question
Main features of a MONOPOLY
answer
1. single firm
2. no close substitutes
3. barrier to entry and exit
2. no close substitutes
3. barrier to entry and exit
question
Natural Barrier
answer
PERMANENT
caused by HIGH FIXED COST and because of this government only allows one company
caused by HIGH FIXED COST and because of this government only allows one company
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Long Run Average Cost Curve for NATURAL BARRIERS
answer
the first segment is very large because a single firm can produce enough for the whole market with still cutting costs
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Patent
answer
temporary legal barrier
usually for 20 years - the right to be the ONLY producer
allows prices to be HIGH
usually for 20 years - the right to be the ONLY producer
allows prices to be HIGH
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Economic reason for PATENTS
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to encourage investment in research
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Public Franchising
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temporary legal barrier
government that allows only ONE franchise
there is no economic reasons
government that allows only ONE franchise
there is no economic reasons
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Pricing Power (Market Power)
answer
when they increase price they will lose some customers - NOT ALL
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Demand Curve
answer
negative slope
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MR Curve
answer
MR is ALWAYS lower than the demand curve
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Economic Explanation of MR Curve
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to attract new customers the firm lowers the price for all existing customers
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Output Rule
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MR is greater than or equal to MC
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Pricing Rule
answer
(demand curve) the highest price consumers are willing to pay
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MR (equation)
answer
change in TR over change in Q
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MC (equation)
answer
change in TC over change in Q
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TR (equation)
answer
Q multiplied by P
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Natural Monopoly and the MC Curve
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The MC curve intersects MR in the first segment
question
Legal Monopoly and the MC Curve
answer
The MC curve intersects MR curve the second segment
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monopoly v perfect competition
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perfect competition has higher output AND lower prices
perfect competition has NO economic profit
monopoly has economic profit (extra profit)
perfect competition has NO economic profit
monopoly has economic profit (extra profit)
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Anti-Trust Law
answer
the goal is to prevent monopolies - gives government power to stop mergers if they lead to monopolies or too large of market share
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Goals of Regulation
answer
1. increase the output
2. decrease the price
3. have normal profit (eliminate economic profit)
2. decrease the price
3. have normal profit (eliminate economic profit)
question
The Role of Utilities Commission
answer
regulate natural monopolies
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Pricing Rule (as pertains to regulating natural barriers)
answer
price equals ATC
question
Increasing Price in Natural Barrier
answer
justified having higher price by having higher cost - must have approval of Utilities Commission
question
price discrimination
answer
charge different prices to different groups
question
single price monopoly
answer
same price for everybody
question
Conditions for price discrimination
answer
1. groups have to be identifiable
2. groups have different willingness to pay (elasticity of demand)
3. resale has to be very difficult
2. groups have different willingness to pay (elasticity of demand)
3. resale has to be very difficult
question
Price Discrimination and Consumer Surplus
answer
price discrimination REDUCES consumer surplus (bad for consumer)
question
main features of Monopolistic Competition
answer
1. many small firms each with a small market share (like perfect competition)
2. no restrictions on entry and exit (like perfect competition)
3. products are CLOSE substitutes
2. no restrictions on entry and exit (like perfect competition)
3. products are CLOSE substitutes
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Product Differentiating
answer
gives pricing power (can raise price without losing all customers)
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Advertising in monopolistic competition
answer
used to show consumers that they are better so they charge them more
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Real/Perceived Difference goals
answer
to convince consumers to pay more for their product
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Real Differences
answer
Quality
Design
Service
Location
Design
Service
Location
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P & Q Determination for MONOPOLISTIC COMPETTITION
answer
Same as MONOPOLY
MR must be greater than or equal to MC
also MC and MR intersect in second segment
MR must be greater than or equal to MC
also MC and MR intersect in second segment
question
Profitability LONG RUN (monopolistic competition)
answer
no economic profit (like perfect competition)
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Profitability SHORT RUN (monopolistic competition)
answer
you can have LOSSES, PROFIT and NORMAL PROFIT
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Disadvantages of MONOPOLISTIC COMPETITION
answer
1. higher price than perfect competition
2. lower output than perfect competition
3. excess capacity
2. lower output than perfect competition
3. excess capacity
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Advantage of MONOPOLISTIC COMPETITION
answer
1. innovation - investment in research (real product differentiating)
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Capacity
answer
highest output the firm produces by cutting costs
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Excess Capacity
answer
capacity minus long term output
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Rival Goods
answer
consumption by one consumer decreases the availability to others
example: buying a car
example: buying a car
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Non Rival
answer
consumption by one customer does not decrease the availability to others
example: radio signal, watching TV, uncongested roads/bridges and police
example: radio signal, watching TV, uncongested roads/bridges and police
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Excludable
answer
if it's possible to prevent those who do NOT pay for it from consuming it (not possible or extremely expensive)
example: ice cream shop or car
example: ice cream shop or car
question
Non Excludable
answer
not preventing those who do NOT pay from consuming the product
example: light house and sidewalk
example: light house and sidewalk
question
conditions for public goods
answer
1. non rival
2. non excludable
2. non excludable
question
Marginal Benefit is also...
answer
the demand curve
question
Marginal Cost is also...
answer
the supply curve
question
Marginal Benefits equals
answer
Total Time Saved x Average Wage [per hour]
question
Decision Rule
answer
MB is greater or equal to MC
(optimal output is at the point when MB and MC cross)
(optimal output is at the point when MB and MC cross)
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Principle Agent Problem (private firm)
answer
If agent does what they're supposed to do for principle there will be no problem
EXAMPLE:
agent= CEO of firm
principle= shareholders of firm
EXAMPLE:
agent= CEO of firm
principle= shareholders of firm
question
Principle Agent Problem (politics)
answer
if agent does what they are supposed to do for the principle there will be no problem
EXAMPLE:
agent= politician
principle= taxpayers
EXAMPLE:
agent= politician
principle= taxpayers
question
Social Interest Theory
answer
justifies there being no principle agent problem by saying politicians (agents) fear being voted out of office by taxpayers (principle)
optimal output in this theory
optimal output in this theory
question
Public Choice Theory
answer
there IS a principle agent problem even in a democracy
1. output is not optimal (over/under produced)
2. Lobbyists bribe politicians and the politicians do not feel like they will be kicked out of office
1. output is not optimal (over/under produced)
2. Lobbyists bribe politicians and the politicians do not feel like they will be kicked out of office
question
Negative Externalities
answer
the producer/consumer receives all the benefits, but does not pay all the cost
example: global warming
example: global warming
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Coase Theorem
answer
under SPECIFIC conditions only can negative externalities be dealt without government intervention
question
Conditions for COASE THEOREM
answer
1. small number - only effects a small amount of people
2. well defined property rights over the thing being effected.
3. small/low transaction cost (cost of doing business or negotiation cost)
2. well defined property rights over the thing being effected.
3. small/low transaction cost (cost of doing business or negotiation cost)
question
Pigovian Tax
answer
tax on polluted goods
purpose: make company pay full cost on polluting good and reduce pollution
purpose: make company pay full cost on polluting good and reduce pollution
question
Marginal Social Cost
answer
larger than MC (includes external cost)
cost of society at large
cost of society at large
question
MSC equals...
answer
MC + external cost
question
External Cost
answer
means you are overproducing
question
Emission Charges
answer
targets the pollutants - charges by product
EX: tax on CO2, extra CO2 is charged by the pound
proportional to amount of pollutant (per unit)
EX: tax on CO2, extra CO2 is charged by the pound
proportional to amount of pollutant (per unit)
question
Bans
answer
prohibits action
question
Marketplace Permits
answer
reduces pollution in least costly way possible
question
Marginal Cost of Marketplace (increase)
answer
if the company reduces pollution by LESS then their initial minimum set they will get penalized
question
Marginal Cost of Marketplace (decrease)
answer
if the company reduces by MORE than initial minimum set they will get rewarded
question
Positive Externalities
answer
a producer or consumer pays full cost, but doesn't receive all the benefits
examples: education and vaccines
examples: education and vaccines
question
Public Provision
answer
government produces the product or service and gives access to everyone
example: public school k-12
example: public school k-12
question
External Benefit
answer
means you are underproducing
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