Monopoly - Assignment Essays

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Market Structure Analysis

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By observing a few industry characteristics, we can predict pricing and output behavior of the firm

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Important Factors regarding firms

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Number of firms
Nature of product
Barriers to entry
Extent of control over price

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Primary Market Structures

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1. Primary Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

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Perfect Competition

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Characteristics:
Many buyers and sellers
Homogeneous (standardized) products
No barriers to market entry or exit
No long-run economic profits
No control over price
Example: Wheat Industry, New York hot dog vendors

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Bad quality is eventually wiped out by ______

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Competition

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Monopolistic competition

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Characteristics:
-Many buyers and sellers
-Differentiated products
-No barriers to market entry or exit
-No long-run economic profits
-Some control over price
-Example: Pizza companies Dominos Papa Johns, etc

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Oligopoly

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Characteristics:
-Fewer Firms
-Mutually interdependent decisions
-Substantial barriers to entry
-Potential for long-run economic profits
-Shared market power and considerable control over price
Example: Car industry, Gas stations

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Monopoly

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Characteristics:
-One firm
-No close substitutes for product
-Nearly insuperable barriers to entry
-Potential for long-run economic profits
-Substantial market power and control over price
Example: Diamond Industry

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Perfect Competitive Market

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In a perfectly competitive market, each firm is a PRICE TAKER.
Each firm's total revenue will be equal to: price x quantity sold= (PxQ)

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Price Taker

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Individual firms in competitive markets get their prices from the market since they are so small that they cannot influence market price

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Marginal Revenue

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Change in total revenue that results from the sale of once added unit of a product

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Total Revenue equation:
and Marginal revenue:

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P x Q
DeltaTR/DeltaQ (Change in total revenue vs change in quantity

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The Profit-Maximizing Rule

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-A firm maximizes profit by producing at the point where marginal revenue equals marginal cost (MR=MC)
-If a firm is earning zero economic profit at this point, it means that it is earning a normal rate of accounting profit.

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Profit

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equal to the price minus the average total cost times the quantity

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Five Steps Maximizing Profit

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- Find the point where MC = MR
- Find the corresponding output level
- Find the profit maximizing price by coming up to the demand curve
- At the profit maximising output find the average total cost
- Find the profit = (P- ATC) x Quantity

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In the short run, one factor of production is fixed, usually the plant size.

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- Firm Cannot eneter or leave the industry

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In the long run, all factors are variable

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- Firms will enter the industry in response to profits
Firms will leave the industry in response to losses

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Normal Profit equal

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Zero economic profits
Where P = ATC

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Loss minimization

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If price falls below average total cost, the firm will incur a loss.
The firm can minimize the loss by following this rule:
-Continue to produce (in the short run) as long as price covers average variable cost
- Shut down in the short run if price falls below average variable cost

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Loss =

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Negative profit = (P-ATC) x Quantity

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When to shut Down?

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Losses begin to exceed fixed costs. The firm will do better to close down and limit losses to fixed costs.

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Shutdown rule:

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When the price falls below minimum AVC, firm should shut down immediately

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Short-run Supply Curve

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The firm's short-run supply curve is its marginal cost curve above the minimum point on the average variable cost curve

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Long Run Adjustments

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-If firms in the industry are earning short run economic profits, new firms can be expected to enter the industry in the long run, or existing firms may increase the scale of their operations.
- Losses will lead to the exit of some firms
- Final equilibrium in the long run is the point at which industry price is just tangent to the minimum point on the ATC curve.

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Economic profits attract more _____

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Supplies

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Above normal profits

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increase industry supply and market price falls. Profits decline toward zero economic profits.

1 of 26

question

Market Structure Analysis

answer

By observing a few industry characteristics, we can predict pricing and output behavior of the firm

question

Important Factors regarding firms

answer

Number of firms
Nature of product
Barriers to entry
Extent of control over price

question

Primary Market Structures

answer

1. Primary Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

question

Perfect Competition

answer

question

Bad quality is eventually wiped out by ______

answer

Competition

question

Monopolistic competition

answer

question

Oligopoly

answer

question

Monopoly

answer

question

Perfect Competitive Market

answer

In a perfectly competitive market, each firm is a PRICE TAKER.
Each firm's total revenue will be equal to: price x quantity sold= (PxQ)

question

Price Taker

answer

Individual firms in competitive markets get their prices from the market since they are so small that they cannot influence market price

question

Marginal Revenue

answer

Change in total revenue that results from the sale of once added unit of a product

question

Total Revenue equation:
and Marginal revenue:

answer

P x Q
DeltaTR/DeltaQ (Change in total revenue vs change in quantity

question

The Profit-Maximizing Rule

answer

question

Profit

answer

equal to the price minus the average total cost times the quantity

question

Five Steps Maximizing Profit

answer

question

In the short run, one factor of production is fixed, usually the plant size.

answer

- Firm Cannot eneter or leave the industry

question

In the long run, all factors are variable

answer

- Firms will enter the industry in response to profits
Firms will leave the industry in response to losses

question

Normal Profit equal

answer

Zero economic profits
Where P = ATC

question

Loss minimization

answer

question

Loss =

answer

Negative profit = (P-ATC) x Quantity

question

When to shut Down?

answer

Losses begin to exceed fixed costs. The firm will do better to close down and limit losses to fixed costs.

question

Shutdown rule:

answer

When the price falls below minimum AVC, firm should shut down immediately

question

Short-run Supply Curve

answer

The firm's short-run supply curve is its marginal cost curve above the minimum point on the average variable cost curve

question

Long Run Adjustments

answer

question

Economic profits attract more _____

answer

Supplies

question

Above normal profits

answer

increase industry supply and market price falls. Profits decline toward zero economic profits.

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