Term
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Definition
change in revenue resulting from a one-unit increase in output.
i.e. ∆R/∆Q
(∆R = ∆PQ) |
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Term
| demand curve with a monopoly |
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Definition
= average revenue
straight diagonal, downward sloping (slope of 1)
marginal revenue curve steeper |
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Term
| market power in a monopoly |
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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. |
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Term
| when a monopoly produces more goods... |
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Definition
MR and AR (demand) fall
- MR more steeply |
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Term
| in monopoly, profit is maximized... |
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Definition
when marginal revenue equals marginal cost
(not just in a monopoly?) |
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Term
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Definition
because no one else is producing
- upward sloping due to scarce inputs (gets more expensive to produce as quantity increases) |
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Term
| market equilibrium is where... |
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Definition
demand (AR) = supply (MC)
higher and to right of prof point |
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Term
| object of regulation with a monopoly is... |
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Definition
... to recover DWL by facilitating entry into markets
- by inviting firms in and developing competition
(monopolies try to protect their market) |
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Term
| monopolist's output decision/profit maximizing condition: |
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Definition
MR = MC
aka...
∆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 |
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Term
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Definition
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Term
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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. |
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Term
| why doesn't a monopolistic market have a supply curve? |
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Definition
the monopolist's output decision depends not only on marginal cost, but also on the shape of the demand curve
shifts 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. |
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Term
| shifts in demand curve in monopolistic market |
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Definition
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Term
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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 |
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Term
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Definition
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Term
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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 |
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Term
| elasticity of market demand... |
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Definition
limits the potential monopoly power of individual producers
eg: OPEC could increase oil prices, while attempts by coffee, cocoa, tin, etc producers to cartelize have largely failed |
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Term
| if only one firm "a pure monopolist"... |
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Definition
| its demand curve is the market demand curve. |
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Term
| when only a few firms account for most of the sales in a market... |
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Definition
| market is highly concentrated |
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Term
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Definition
| raising prices in concert is more likely to be profitable than individually. |
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Term
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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 |
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Term
| regulating the price of a natural monpoly |
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Definition
- if price regulated downward, firm would lose money and go out of business.
- [more....] |
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Term
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Definition
| - because it has economies of scale (declining average and marginal costs) over its entire output range |
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Term
| rate-of-return regulation |
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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) |
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Term
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Definition
| - difficulty of agreeing on a set of numbers leads to delays in the regulatory response to changes in cost and other market conditions |
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Term
| *triangle left of prof-max point: |
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Definition
| below MR, above MC -- lost profit from producing too little and selling at too high of a price |
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Term
| *triangle to the right of prof-max point: |
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Definition
| above MR and below MC -- lost profit from producing too much and selling at too low of a point |
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Term
| Price Elasticity (general) |
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Definition
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Term
| deadweight loss from monopoly power |
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Definition
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Term
| pros of price regulations |
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Definition
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Term
| cons of price regulations |
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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...] |
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Term
| supply curve in a monopsony |
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Definition
| average expenditure (price paid per unit of a good) |
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Term
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Definition
| additional cost of buying one more unit of a good |
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Term
| demand curve in a monopsony |
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Definition
| marginal value -- additional benefit derived from purchasing an additional unit of a good |
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Term
| if competitive buyer takes market price as given... |
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Definition
| marginal expenditure and average expenditure are constant and equal; quantity purchased is found by equating price to marginal value |
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Term
| if competitive seller ALSO takes price as a given... |
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Definition
| marginal revenue and average revenue are constant and equal. quantity sold is found by equating price to marginal cost. |
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Term
| single employer example of a monopsony |
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Definition
employer "buying" labor
- lower wages, fewer jobs |
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Term
| the monpolist produces where... |
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Definition
marginal revenue intersects marginal cost.
- average revenue exceeds marginal revenue, so that price exceeds marginal cost. |
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Term
| the monopsonist purchases up to the point where... |
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Definition
marginal expenditure intersects marginal value.
- marginal expenditure exceeds average expenditure, so that marginal value exceeds price. |
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Term
| effect of elasticity on monopsony power |
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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) |
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Term
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Definition
| market with only one seller and one buyer |
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Term
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Definition
| form of implicit collusion in which one firm consistently follows actions of another |
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Term
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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) |
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Term
| When a monopoly increases amount sold, it has two e ffects on total revenue: |
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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. |
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Term
| the price effect in a monopoly |
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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) |
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Term
| - the output effect in a monopoly |
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Definition
| More output is sold, so Q is higher. |
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Term
| The price that the monopolist charges is.... |
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Definition
| the price at which buyers are willing to buy the pro t-maximizing quantity. |
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