question
Market Power
answer
The ability to alter the market price of a good or service
question
What can firms with market power do?
answer
Firms with market power can alter the price of their output without losing all their customers. (they can confront downward-sloping demand curves for their own output)
question
In perfect competition, the ________ is not the ________ in monopoly it is.
answer
firm, industry
(the curve slopes downward)
(the curve slopes downward)
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Monopoly
answer
a single firm that produces the entire market supply of a particular good or service
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In monopoly situations, the ________ curve facing the firm is identical to the ________ demand curve for the product.
answer
demand; market
(monopolistic firm = industry = market demand curve)
(monopolistic firm = industry = market demand curve)
question
For a monopolist, marginal revenue ________ equal to price.
answer
isn't
(marginal revenue is always less than price - difficult to find the profit-maximizing rate of output)
(marginal revenue is always less than price - difficult to find the profit-maximizing rate of output)
question
Marginal Revenue
answer
the change in total revenue that results from a one-unit increase in the quantity sold
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Equation for Marginal Revenue
answer
Marginal Revenue = change in total revenue/change in quantity sold
question
In a monopoly, if a firm must lower its price to sell additional output, marginal revenue is ________ than price.
answer
less
question
The marginal revenue curve lies below the demand (price) curve at every point but the ________.
answer
first
question
T/F: To find the profit-maximizing rate of output in a monopoly, you look for the intersection of marginal cost and marginal revenue.
answer
True
question
Only ________ price is compatible with the profit-maximizing rule of output.
answer
one
(the price is found by moving up, from where MR=MC, to the demand curve)
(the price is found by moving up, from where MR=MC, to the demand curve)
question
Equation for Total Profit
answer
Quantity sold x (price - ATC)
question
Barriers to Entry
answer
obstacles, such as patents, that make it difficult or impossible for would-be producers to enter a particular market
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Economies of Scale
answer
reductions in minimum average costs that come about through increases in the size (scale) of plant and equipment
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Production Decision
answer
the selection of the short-run rate of output (with existing plants and equipment)
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What does a monopolist foresee and prevent?
answer
A monopolist not only foresees the impact of increased production on market price, but can also prevent such production increases by its separate plants.
question
A reduction in output translates automatically into a decrease in the quantity ________ to the market
answer
supplied
question
T/F: The intersection of the marginal revenue and marginal cost curves establishes the profit-maximizing rate of output.
answer
True
question
The demand curve tells us how much consumers are willing to ________ for that specific quantity of output.
answer
pay
question
Total profits are represented by what on a graph?
answer
Total profits are represented by the shaded rectangle (the point on the demand curve that's directly above the intersection, where MC = MR, and the point directly below the point MC = MR on the ATC curve)
question
A monopoly receives ________ profits than a comparable competitive industry by reducing the quantity supplied and pushing prices ________.
answer
larger; up
question
T/F: There's a basic tendency for monopolies to inhibit productivity declines and economic loss.
answer
False because they inhibit productivity advances and economic growth.
question
Marginal Cost Pricing
answer
The offer (supply) of goods at prices equal to their marginal cost
question
Marginal cost pricing is important to consumers because...
answer
it permits rational choices among alternatives goods and services.
(However, in a monopoly, consumers get a smaller mix of output to choose from)
(However, in a monopoly, consumers get a smaller mix of output to choose from)
question
The greater the price elasticity of demand...
answer
the more a monopolist will be frustrated in attempts to establish both high prices and high volume.
question
If consumer demand is highly inelastic...
answer
the monopolist can get tremendous profit from market power.
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A monopolist may be able to increase total profits by selling each unit of a good separately, at a price each individual is willing to pay.
answer
This is called price discrimination.
(Ex. airline industry)
(Ex. airline industry)
question
What gives monopolists such pricing power?
answer
The lack of competitors. A monopoly must erect and maintain barriers to market entry.
question
What are some entry barriers that monopolists use to repel would-be competitors?
answer
Patents, monopoly franchise, control of key inputs, lawsuits, acquisition, and economies of scale.
question
Pros and cons of research and development?
answer
Monopolists are well-positioned to undertake valuable R&D, but they have no clear incentive to since R&D aren't necessarily required for profitable survival.
question
T/F: efficiency and size don't necessarily go hand in hand. Some firms and industries may be subject to economies of scale, but others won't.
answer
True
(Even when economies of scale are present, there is no guarantee that consumers will benefit)
(Even when economies of scale are present, there is no guarantee that consumers will benefit)
question
Natural Monopoly
answer
an industry in which one firm can achieve economies of scale over the entire range of market supply
(Ex. local telephone and utility services)
(Ex. local telephone and utility services)
question
Contestable Market
answer
an imperfectly competitive industry subject to potential entry if prices or profits increase
(How "contestable" a market is depends on entry barriers)
(How "contestable" a market is depends on entry barriers)
question
If potential rivals force a monopolist to behave like a competitive firm, then monopoly imposes no cost on ________ or on ________ at large.
answer
consumer; society
(potential competition can force a monopoly to change its ways)
(potential competition can force a monopoly to change its ways)
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