# Shared Flashcard Set

## Details

P&R Chap. 10
Market Power: Monopoly and Monopsony
47
Pre-School
10/18/2013

Term
 marginal revenue
Definition
 change in revenue resulting from a one-unit increase in output.i.e. ∆R/∆Q(∆R = ∆PQ)
Term
 demand curve with a monopoly
Definition
 = average revenuestraight diagonal, downward sloping (slope of 1)marginal revenue curve steeper
Term
 market power in a monopoly
Definition
 ability of a seller of buyer to affect the price of a good - "price setter"A monopolist has market power. This means that a firm's actions can influence the price. By producing less, the fim can raise the equilibrium price.Not a price taker.
Term
 when a monopoly produces more goods...
Definition
 MR and AR (demand) fall- MR more steeply
Term
 in monopoly, profit is maximized...
Definition
 when marginal revenue equals marginal cost(not just in a monopoly?)
Term
 MC=S
Definition
 because no one else is producing- upward sloping due to scarce inputs (gets more expensive to produce as quantity increases)
Term
 market equilibrium is where...
Definition
 demand (AR) = supply (MC)higher and to right of prof point
Term
 object of regulation with a monopoly is...
Definition
 ... to recover DWL by facilitating entry into markets- by inviting firms in and developing competition(monopolies try to protect their market)
Term
 monopolist's output decision/profit maximizing condition:
Definition
 MR = MCaka...∆R/∆Q = ∆C/∆Q(∆R = ∆PQ)*triangle left of prof-max point: below MR, above MC -- lost profit from producing too little and selling at too high of a price*triangle to the right of prof-max point: above MR and below MC -- lost profit from producing too much and selling at too low of a point
Term
 marginal cost
Definition
 ∆C/∆Q
Term
 pricing rule of thumb
Definition
 P=MC/[1+(1/Ed)]The price that the monopolist charges is the price at which buyers are willing to buy the pro t-maximizing quantity.
Term
 why doesn't a monopolistic market have a supply curve?
Definition
 the monopolist's output decision depends not only on marginal cost, but also on the shape of the demand curveshifts in demand can lead to changes in price with no change in output, changes in output with no changes in prices, or changes in both price and output. i.e. there is no one-to-one relationship between price and quantity produced.
Term
 shifts in demand curve in monopolistic market
Definition
 [review this]
Term
 effect of a tax
Definition
 new optimal production decision is MR=MC+t- MC+t line is horizontal and moves up- less is produced, as the price of the good gets higher, reducing demand
Term
 multiplant firms
Definition
 [review if need this]
Term
 Ability to markup
Definition
 (P-MC)/P - equal to minus the inverse of the elasticity of demand facing the firm - if demand is elastic, markup is small and firm has little monopoly power (and vice versa)- will still shut down if not making profits
Term
 elasticity of market demand...
Definition
 limits the potential monopoly power of individual producerseg: OPEC could increase oil prices, while attempts by coffee, cocoa, tin, etc producers to cartelize have largely failed
Term
 if only one firm "a pure monopolist"...
Definition
 its demand curve is the market demand curve.
Term
 when only a few firms account for most of the sales in a market...
Definition
 market is highly concentrated
Term
 problem of collusion
Definition
 raising prices in concert is more likely to be profitable than individually.
Term
 natural monopoly
Definition
 firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms- because it has economies of scale (declining average and marginal costs) over its entire output range
Term
 regulating the price of a natural monpoly
Definition
 - if price regulated downward, firm would lose money and go out of business.- [more....]
Term
 why natural monopoly?
Definition
 - because it has economies of scale (declining average and marginal costs) over its entire output range
Term
 rate-of-return regulation
Definition
 maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn- difficulty of agreeing on a set of numbers leads to delays in the regulatory response to changes in cost and other market conditions (regulatory lag)
Term
 regulatory lag
Definition
 - difficulty of agreeing on a set of numbers leads to delays in the regulatory response to changes in cost and other market conditions
Term
 *triangle left of prof-max point:
Definition
 below MR, above MC -- lost profit from producing too little and selling at too high of a price
Term
 *triangle to the right of prof-max point:
Definition
 above MR and below MC -- lost profit from producing too much and selling at too low of a point
Term
 Price Elasticity (general)
Definition
 ED = %∆Qd/%∆p
Term
Definition
 [review map]
Term
 pros of price regulations
Definition
 allows some DWL recovery
Term
 cons of price regulations
Definition
 - requires info we dont have- economics rents (price above market price) = incentive to lobby for industry competitive- hard to tell where supply curve is... thus hard to regulate at q*- regs usually cannot pick efficient price[more...]
Term
 supply curve in a monopsony
Definition
 average expenditure (price paid per unit of a good)
Term
 marginal expenditure
Definition
Term
 demand curve in a monopsony
Definition
Term
 if competitive buyer takes market price as given...
Definition
 marginal expenditure and average expenditure are constant and equal; quantity purchased is found by equating price to marginal value
Term
 if competitive seller ALSO takes price as a given...
Definition
 marginal revenue and average revenue are constant and equal. quantity sold is found by equating price to marginal cost.
Term
 single employer example of a monopsony
Definition
 employer "buying" labor- lower wages, fewer jobs
Term
 the monpolist produces where...
Definition
 marginal revenue intersects marginal cost. - average revenue exceeds marginal revenue, so that price exceeds marginal cost.
Term
 the monopsonist purchases up to the point where...
Definition
 marginal expenditure intersects marginal value. - marginal expenditure exceeds average expenditure, so that marginal value exceeds price.
Term
 effect of elasticity on monopsony power
Definition
 - when supply is elastic, marginal expenditure and average expenditure do not differ by much, so price is close to what it would it would be in a competitive market(and vice versa when supply is inelastic)
Term
 bilateral monopoly
Definition
 market with only one seller and one buyer
Term
 parallel conduct
Definition
 form of implicit collusion in which one firm consistently follows actions of another
Term
 predatory pricing
Definition
 practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits(jiffy lube example)
Term
 When a monopoly increases amount sold, it has two e ffects on total revenue:
Definition
 - the output effect: More output is sold, so Q is higher.- the price effect: To sell more, the price must decrease, so P is lower.
Term
 the price effect in a monopoly
Definition
 To sell more, the price must decrease, so P is lower.- For a competitive firm there is no price effect. The competitive firm can sell all it wants at the given price.- For a monopoly there is a price effect. It must reduce price to sell additional output. So the marginal revenue on its additional unit sold is lower than the price, because it gets less revenue for previous units as well (it has to reduce price to the same amount for all units)
Term
 - the output effect in a monopoly
Definition
 More output is sold, so Q is higher.
Term
 The price that the monopolist charges is....
Definition
 the price at which buyers are willing to buy the pro t-maximizing quantity.
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