Econ Exam 2 Chapter 9

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  1. Imperfectly competitive industry
    • An industry in which single firms have some control over the price of their output
    • Still competition, firms can differentiate, advertise
  2. Market Power
    An imperfectly competitive's firms power to rise demand without loosing demand
  3. Pure monopoly
    • An industry where only one firm produces a produce
    • -There are no close substitutes
    • -Significant barriers to entry exist to prevent other firms from entering the industry to compete for profits
  4. Define no close substitutes
    • Without close substitutes, monopolist can change their prices without fear of loosing demand because costumers can't switch to another product
    • Fewer substitutes = less elastic = more power
    • The more broader a product is the more complicated it becomes to find a substitute
    • -ex. substitute for food vs. substitute for burger
  5. Define Barriers to entry
    • Something that prevents new firms from entering and competing
    • Monopolist can prevent other firms from entering
    • -If other firms enter it is no longer a monopoly
    • B/c of this monopolist can earn positive profit year after year
  6. Types of Barriers to Entry
    • Government Franchising or Licensing
    • -ABC stores, USPS
    • Patents: Grands exclusive use of patented product to its inventor for a limited period of time
    • -Brand name drugs
    • Economies of scale or other cost advantage
    • -High start up prices, natural barrier, gas company
    • Ownership of scarce factor of production
    • -Debeer's in Diamonds
  7. Firms with market power has to decide
    • How much to produce
    • How to produce it
    • How much to demand in each input market
    • *What price to charge for their outpu
    • -"price searchers"
  8. Profit Maximization
    • MR=MC
    • Firms should produce until the cost of the last unit made is equal to the increase in revenue from the last unit made
  9. Monopolist and Marginal Revenue
    • Choosing a higher quantity involves not just producing more but also reducing its price
    • Will never choose negative revenue 
    • Will always be on elastic portion of demand curve
  10. The sad monopolist
    • Not all monopolies are guaranteed to make profit
    • One ca incur short run losses and can be force to shut down in the short run
    • -Monopolist should produce if P>AVC but should shut down if P<AVC
    • Ex. if you opened a BBQ hamster shop
  11. Stupid Monopolist
    Figuring out what the demand curve looks like is very difficult or where the MC curve will be to you can't just say to find the Q where MC=MR
  12. Monopoly and supply curve
    • There is none
    • The amount is supplies depends on both its marginal cost curve and the demand curve it faces
  13. Monopoly vs. Perfect Competition
    • Monopolist choose a lower quantity and charge a higher price also operate at a point with higher average total costs
    • By rising price and cutting quantity monopolist steal surplus from consumers
    • Some surplus goes to firms as "producer surplus" and some is lost competely "deadweight loss"
  14. Dead weight loss
    • Could be lower if monopoly achieves some cost saving economies of scale 
    • Could be greater if resources were used to achieve this monopoly power
    • -Rent seeking, political lobbying
  15. Why are monopolies bad?
    • 1. Resulting in quantity less than optimal PC quantity (and price higher than PC price) - this causes "dead weight loss"
    • 2. They don't have much incentive to cut cost. Do not operate at the minimum ATC
    • 3. Often spend resources to keep their power (rent seeking) and may do other bad things to keep power
  16. Cost Cutting
    • PC firms have big incentive to cost cut because if one firm does the other has to to continue to make a profit
    • Monopolies earn more profit by cutting costs, but the benefits are not as large as it would be for a PC firm
  17. Natural monopoly
    • An industry that realizes such large economies of sclae in producing its product that single firm production of the good or service is most efficient
    • Gas electric
    • Government over see's them, forcing lower prices
  18. First degree Price discrimination
    • -A firm charges maximum amount to buyers willing to buy
    • Consumer surplus goes to monopolist
    • Almost impossible to do
  19. Third Degree price discrimination
    • Firms charge people different prices base don observable consumer attributes
    • ex. cheaper movie tickers for students or seniors, charges less in order to maximize profits
  20. Second degree price discrimination
    • firms charge different prices based on unobservable consumer attributes
    •  -Sam's club or quantity discounts
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Econ Exam 2 Chapter 9
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