Ch. 13
Figure 13.8
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How do you measure the efficiency loss (in dollar terms) on a supply and demand diagram?
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Patent
A barrier to entry that grants exclusive use of the patented product or process to the inventor +incentive to invent and innovate -slow down benefits of research flowing thru market to consumers Ownership of a key resource. (rare) Costs of production make a single producer more efficient than a large number of producers.
Figure 13.3
A monopoly's marginal revenue curve bisects the quantity axis between the origin and the point where the demand curve hits the quantity axis (THE MIDPOINT). Above the midpoint, TR ^, MR + Below the midpoint, TR decreasing, MR - Monopoly's MR curve shows that the change in TR that results as a firm moves along the segment of the demand curve that lies exactly above it
Natural monoply
AN industry that realizes such large economies of scale that single-firm production of that good or service is most efficient
What is rent-seeking behavior? Why is it socially wasteful?
Actions taken by households or firms to preserve economic profits •Consumes resources and adds to social cost, thus reducing social welfare even further
What is meant by market power?
An imperfectly competitive firm's ability to raise price without losing all of the quantity demanded for its product
Who is able to bring suit under the law?
Antitrust Division of the Justice Department Federal Trade Commission (FTC) Private citizens
Figure 13.2
At every level of output except 1 unit, a monopolist's marginal revenue is below price. -must sell all its product at a single price (no price discrimination) -to raise output and sell it, the firm must lower the price it charges
Why might some of the monopolist's profits end up as a social loss?
Charging a higher price for a product and producing less quantity leads to an inefficient mix of output leading to a social loss.
How are the antitrust laws enforced?
Federal Trade Commission- A federal regulatory group created by Congress in 1914 to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful "unfair" behavior, and to issue cease-and-desist orders to those found in violation of antitrust law
How do the monopoly profit-maximizing price and quantity compare to the price and quantity that a perfectly competitive industry would provide?
MC=MP MC=MR, very similar.
How do you find the profit-maximizing output level and price for a monopolist?
MR = MC (where MC and MR intersect, that quantity) Price chosen will be above MC -where demand curve hits that quantity
Why is marginal revenue less than the price for a firm with market power (that cannot price discriminate)?
Marginal revenue is less than the price for a firm with market power because in order to sell more output they must sell it for a lower price.
Figure 13.6
Monopolies are price setters and quantities setters, they can produce/price anywhere along the demand curve. In monopoly vs. perfectly comp.: < quantity produced > price
Why does monopoly lead to an inefficient outcome for society?
Monopolies are price setters and quantities setters, they can produce/price anywhere along the demand curve. In monopoly vs. perfectly comp.: < quantity produced > price
Figure 13.4
Profit maximizing monopolist will raise output as long as marginal revenue exceeds marginal cost
Ownership of Scare Factor of Production
Rare. Ownership = barrier alone.
What is the rule of reason in antitrust cases?
The criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal (unreasonable) or legal (reasonable) within the terms of the Sherman Act
Government Rules
The government gives a single firm the exclusive right to produce some good. -Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest. -convient sources of revenues
What does the elasticity of demand for a good have to do with the potential for a firm to exercise market power over its sales?
The more broadly we define the industry, the fewer substitutes there are; thus, the less elastic the demand for that industry's product is likely to be.
Why are barriers to entry important to market power?
These factors prevent new firms from entering and competing in imperfectly competitive industries It allows monopolies to exist. -the term barriers to entry is used to describe the set of factors that prevent new firms from entering a market with excess profits
How do you find the profit that they earn?
any + difference between MR and MC = Profit
Network Effects (network externalities)
network externalities- value of a product to a consumer increases w/ the # of that product being sold or used in the market large consumer base = advantage when new firms come
What are the forms of imperfect competition?
Monopoly: An industry with a single firm in which the entry of new firms is blocked Oligopoly: An industry in which there is a small number of firms, each large enough so that its presence affects prices Monopolistic competitors: firms that differentiate their products in industries with many producers and free entry
How do you calculate marginal revenue for a monopolist?
New price - previous q = MR or TR4- TR3= MR or (Q4*Price)-(Q3*Price)= MR
Table 13.1
New price - previous q = MR or TR4- TR3= MR or (Q4*Price)-(Q3*Price)= MR
What are some sources of barriers to entry?
Next series of cards
What do Section 1 and Section 2 of the Sherman Act forbid?
Section 1: Can't restrict trade with fellow states or foreign nations Section 2: can't monopolize or attempt to monopolize Misdemeanor: Up to $5,000 prison up to 1 year
What can firms with market power do that firms in competitive markets cannot? What limits their choices?
Set market price Looks at trade offs in terms of profits earned between getting more money for each unit sold vs. selling fewer units
What sorts of remedies do courts impose?
Sherman Act of 1890 Rule of Reason Consent decree- formal agreement between a prosecuting government and defendants that must be approved by the courts