ECON 101 Lecture Notes - Lecture 18: Deadweight Loss, Economic Surplus, Marginal Revenue

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6 Jun 2016

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ECON 101 Full Course Notes

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Chapter 15: how firms behave when they have market power: monopolies. Markets work best when there is strong competition: many producers have to compete to attract buyers. Markets work best when there are many buyers: compete for products by paying a price high enough to make it profitable for companies to produce. A monopolist is a price maker: decides what quantity to produce and what price to set to maximize profits, the producer does not have to worry about competition. Government policies prevent the entry of new firms in a market: promote innovation. The product or service results in a natural monopoly: natural monopoly a single firm can supply an entire market at a lower cost than two or more firms. Ex: electric utility: results in lowest production cost, but not necessarily best price or quality. Network externalities bar others from selling an equivalent product: network externality a person values a good more when more people use it.

Related Questions

1. How is a monopolistically competitive market similar to a perfectly competitive market?

A. There are no restrictions on the entry of new firms.

B. Both have differentiated products with close substitutes.

C. Producers with market power set their own prices.

D. Both have homogeneous products with no close substitutes.

2. Which of the following common features do monopolistically competitive markets, and monopolies share?

A. Barriers restrict new firms from entering.

B. Firms face downward-sloping demand curves.

C. Consumers with market power set prices.

D. Producers with no market power set their own prices.

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The terms price maker, price setter, and price searcher are all meant to imply the same thing, which is

Select one:

a. firms operating in a perfectly competitive market have pricing power.

b. it is impossible for any firm to have pricing power.

c. a firm operating in any market but perfect competition that also determines the quantity it produces and the price at which it sells the products.

d. any firm can determine the price at which it sells a product, but no firm can determine the quantity it produces.

e. a price increase will likely drive every customer for the producer of this product to another product.

In monopoly,

Select one:

a. the number of firms is large.

b. there is ease of entry into the market and exit from the market.

c. the product has many good substitutes.

d. economic profits are zero in the long run.

e. None of these choices.

1. Characteristics of competitive markets

The model of competitive markets relies on these three core assumptions:

1.	There must be many buyers and sellers a few players can't dominate the market.
2.	Firms must produce identical products buyers must regard all sellers' products as equivalent.
3.	Firms and resources must be fully mobile, allowing free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

Scenario	Competitive?
The government has granted the U.S. Postal Service the exclusive right to deliver mail.	________________
Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices.
Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one.	_________________
There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to

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ECON 101 Lecture Notes - Lecture 18: Deadweight Loss, Economic Surplus, Marginal Revenue

ECON 101 Full Course Notes

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