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Chapter 15-22

ECON 1000 Chapter 15-22: Chapter 15 - 22 ECON 1000
ECON 1000 Chapter 15-22: Chapter 15 - 22 ECON 1000

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Carleton University
ECON 1000
Nick Rowe

Chapter 15: Monopoly Key terms: ➢ Monopoly: a firm that is the sole seller of a product without close substitutes. ➢ Natural Monopoly: A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. ➢ Price discrimination: the business practice of selling the same good at different prices to different customers. ➢ Monopoly Resources: A key resources is owned by a single firm. ➢ Government-created monopolies: The government gives a single firm the exclusive right to produce some good or service. Core Principles: 1. Monopoly Resources a. Simplest way for monopolies to arise, for a single firm to own a key resource. b. Because of the nature of international trade theses rarely happen. 2. Government-Created Monopolies a. Can arise from sheer political scenarios. b. Usually grant monopolies because it is in the public interest. c. I.e patents. i. Laws can create incentive for creative activity. Costs of monopoly pricing are an issue. 3. Natural Monopoly a. Arise when economies of scale are dominant rather than relevant ranges of output. b. Firms don’t enter natural monopoly economies. 4. Monopoly vs Competition a. Monopoly can influence the price of its output by will, whereas competition cannot. b. Monopolies can adjust prices by changing their output. c. Monopoly demand curves are market demand curves. 5. Monopoly’s revenue a. A monopolist’s marginal revenue is always less than the price of its good. b. The output effect: more output is sold, so q is higher, which tends to increase total revenue. c. The price effect: the price falls, so P is lower, which tends to decrease total revenue. d. Marginal revenue and demand curve always start from the same point. e. Marginal revenue is always below the demand curve. f. Marginal revenue is negative when the price effect on revenue is greater than the output effect. 6. Profit Maximization a. When marginal cost is less than marginal revenue, an extra unit of production is too costly. b. Monopolies maximize profit by choosing the quantity at which marginal revenue equals marginal costs, then you line that up with the demand curve to find the price and quantity. c. Thus monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal cost-curve. d. In competitive markets, price equals marginal cost, in monopoly price exceeds marginal cost. i. Competitive: P = MR = MC ii. Monopoly: P > MR = MC 7. Monopoly’s profit: a. Profit = TR – TC b. Profit = (TR/Q – TC/Q) X Q c. Profit = (P – ATC) X Q 8. Deadweight loss a. The social efficient quantity is found where the demand curve and the marginal- cost curve intersect. b. The monopolist produces less than the socially efficient quantity of output. i. Thus because of this paradox a deadweight loss is created. 9. Monopoly’s profit: a social cost a. Monopolies do not shrink total surplus. It just makes consumers worse off and the producer far better off. b. Because high prices discourage buyers, the deadweight loss is created, by the high prices are necessary otherwise the firm would lose money. 10. Public Policy a. Regulation b. Laws that make more competition. c. Turn private monopolies into public institutions. d. Do nothing at all. Chapter 16: Monopolistic Competition Key terms: ➢ Oligopoly: a market structure in which only a few sellers offer similar or identical products. ➢ Monopolistic competition: a market structure in which many firms sell products that are similar but not identical. Core Principles: 1. Difference between Monopoly and Competition a. Many sellers b. Product differential c. Free entry and exit 2. Long-run equilibrium a. As in a monopoly market, price exceeds marginal cost. This conclusion arises because profit maximization requires marginal revenue to equal marginal cost and because the downward-sloping demand curve makes marginal revenue less than the price. b. As in a competitive marker, price equals average total cost. This conclusion arises because free entry and exit drive economic profit to zero. 3. Monopolistic vs Perfect Competition a. 1. Perfectly competitive firm produces at the efficient scale, where average total cost is minimized. By contrast, the monopolistically competitive firm produces at less than the efficient scale. b. 2. Price equals marginal cost under perfect competition, but price is above marginal cost under monopolistic competition. c. Excess capacity i. Quantity that minimizes ATC is called efficient scale of the firm. ii. In long run firms produce at the efficient scale (competitive) but monopolies do not. They produce below this level. iii. Excess capacity under monopolistic competition. d. Marginal cost/mark up i. Price exeeds marginal cost so monopolies need constant return of customers so extra units sold are profit where as competitive firms don’t care because they make profits at any price (generally.) 4. Monopoly and welfare a. The product-variety externality: because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers. b. The business-stealing externality: because other firms lose customers and profits from the entry of a new competitor entry of a new firm imposes a negative externality on existing firms. Chapter 17: Oligopoly Key terms: ➢ Collusion: an agreement among firms in a market about quantities to produce or prices to charge. ➢ Cartel: A group of firms acting in unison. ➢ Nash equilibrium: a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. ➢ Prisoner’s dilemma: a particular ‘game’ between two capture prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. ➢ Dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players. ➢ Core Principles: 1. Duopoly a. Oligopoly with only two firms in the market b. Same problems across the board for an oligopoly c. Collusion, where firms agree on the amount to produce in order to affect prices. 2. Competition, Monopoly and Cartels a. Collusion, and when multiple groups collude they become a cartel. b. When firms work together they can simulate monopolistic economies to maximize profits c. Cartels must agree on both production and price in order to make sure price exceeds marginal cost 3. Equilibrium for an Oligopoly a. Nash equilibriums, a situation in which economic actors interacting with one another each choose their best strategy given the strategies the others have chosen. b. There is a tension between cooperation and self-interest. c. Oligopolies are better pursuing monopoly but they act in self-interest preventing them from doing this. d. When firms in an oligopoly individually choose production to maximize profit, they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price. (which is marginal cost) 4. How the size of Oligopoly affects market outcome? a. The Output effect: because price is above marginal cost, selling 1 more litre of water at the going price will raise profit. b. The price effect: Raising production will increase the total amount sold, which will lower the price of water and l
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