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UC - 28AA-PBA 1001 - Microeconomics Final Exam Study Guide - Study

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UC - 28AA-PBA 1001 - Microeconomics Final Exam Study Guide - Study

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background image MICROECONOMICS FINAL EXAM STUDY GUIDE 
(you should also review class slides, chapter summaries, and key graphs)
CHAPTER 12 PURE MONOPOLY PURE MONOPOLY
pure monopoly
-a market structure in which one firm 
sells a unique product, into which entry is blocked, in which the single firm  has considerable control over product price and in which  nonprice competition may or may not be found  —exists when a single firm is the sole producer of a product for which  there are no close substitutes.  imperfect competition main characteristics of pure monopoly  single seller-single firm is sole producer/sole supplies of specific  good/service—firm and industry are synonomous no close substitutes-product is unique, no substitutes  price maker-(unlike pure competition)-pure monopoly controls the  total quantity supplied-thus has considerable control over price confronts the usual downsloping product demand curve  can change product price by changing the quantity produced will use its power whenever its advantageous blocked entry-no immediate competitors b/c certain barriers keep  potential competitors from entering the industry barriers may be economic technological legal or some other type  nonprice competition-product produced may either be  standardized (natural gas and electricity) or differentiated (windows  are frisbees) standardized product companies engage in mainly public 
relations advertising
differentiated product companies often advertise product 
attributes
Examples of Monopoly pure monopoly is relatively rare many examples of  less pure forms/near monopolies  government regulated utilities- gas and electric, water companies, cable tv companies, 
background image local telephone companies professional sports teams small town barber, train station, airline= geographic monopoly barriers to entry-anything that artificially prevents the entry of firms  into an industry—factors that prohibit others from entering an industry  factors that prohibit firms from entering ash industry=barriers to  entry somewhat weaker barriers in oligopoly (dominated by a few firmms) weaker still allows entry of many firms and gives rise to monopolistic  competition weaker still = all the firms come to play and pure competition is born 4 MOST COMMON BARRIERS TO ENTRY 1. Economics of Scale-when long run ATC is declining, only a single  producer or monopolist, can produce any particular amount of  output at minimum total cost—it cuts out other smaller competitors  because huge firms produce on a large scale and can thus afford the  expensive equipment that enables them to produce at a lower cost  per unit of production you can’t start out big, this explains why entries into industries  such as computer operating software, commercial aircraft and  household laundry equipment are so rare a monopoly firm is referred to as a natural monopoly if the 
market demand curve intersects the long run ATC curve at 
any point where average total costs are declining 
natural monopolist may obtain substantial economic profit by  setting a price above average total cost  they can charge so much because they are a monopoly— governments regulate monopolies for this reason 2. Legal Barriers to Entry: Patents & Licenses  government also creates barriers to entry by awarding patents  and licenses  PATENTS-exclusive right of an inventor to use or allow another  to use her invention used to protect inventors from those who would like to  share in profits by stealing ideas without having done the  work  they provide the inventor with a monopoly position over  the invention for the life of the patent (thus strengthening  market position) 
background image research and development leads to most patentable  inventions/products  funds from patented products allow for development of  new patentable products—>becomes a cycle, like  pharmaceutical companies LICENSES-liquor, radio and television, there are only so many  licenses  only so many license exist so new firms cannot enter and  drive prices down 3. Ownership or Control of Essential Resources monopolist can use private property as an obstacle to potential  rivals  like owning land that has valuable and rare resources  nickel company in canada at one time owned land containing  90% of the worlds known nickel reserves  4. Pricing & Other Strategic Barriers to Entry monopolists may create barriers to entry-say a new firm  enters an industry, the monopolist can afford to slash its prices  to cut out the competition that cannot afford to do this  because they have yet to achieve economics of scale sometimes illegal actions are taken MONOPOLY DEMAN
explain how demand is seen by a pure monopoly 
3 assumptions 
1. patents, economics of scale, or resource ownership secures the  firms monopoly 2. no unit of government regulates the firm 3. the firm is a single-price monopolist: it charges the same price for all  units of output  ******the major difference b/t a pure monopolist and a purely 
competitive seller
 lies on the demand side of the market 
purely competitive seller— perfectly elastic demand at price determined by market supply and  demand price taker (can sell as much or little as it wants at markets going  price) each additional unit sold will add the price of the unit to the firms 
total revenue  (
marginal revenue is constant=product price) monopolist— 
background image firms with downward sloping product demand curves are price 
makers
demand curve is quite different from purely competitive seller b/c the monopolist is the industry its demand curve is the market  demand curve and b/c market demand curve is not perfectly elastic, the  monopolists demand curve is down-sloping  quantity demanded increases as price decreases  yields neither productive nor allocative efficiency (monopolist does  not produce at the minimum point of ATC) pure monopolist is more likely to have economic profit in long run  than pure competition  3 IMPLICATIONS OF DOWN-SLOPING MONOPLY DEMAND CURVE 1. Marginal Revenue is LESS Than Price- with a fixed down-sloping demand curve, the pure monopolist  can increase sales only by charging a lower price consequently marginal revenue (the change in total revenue 
associated with a one-init change in output) is 
less than price why? the lower price of the extra until of output also applies to  all prior units of output (could have sold these units at a higher  price if it had not produced and sold the extra output) see pg 259 charts  demand curve is down-sloping and MARGINAL REV 
CURVE LIES BELOW ITS DEMAND CURVE
2. The Monopolist is a PRICE MAKRER all imperfect competitors (everything except pure 
competition) have downward sloping demand curves
any change in quantity produced causes a movement along  their respective demand curves and a change int he price they  can charge for their respective products    in summary: firms with down-sloping demand  curves=price makers  3. The Monopolist Sets Prices in the Elastic Region of Demand  recall_total-revenue-test reveals that when demand is elastic, a  decline in price will increase total revenue similarly when demand is inelastic, a decline in price will  reduce total revenue seed pg 259 the implication: a monopolist will never choose a price-

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School: University of Cincinnati
Department: Business
Course: Microeconomics
Professor: Sourushe Zandvakili
Term: Summer 2015
Tags: pure, monopoly, oligopoly, monopolistic, competition, health, care, Immigration, poverty, discrimination, wage, determination, micro, Econ, final, finalexamstudyguide, thorough, and notes
Name: Microeconomics Final Exam Study Guide
Description: These notes cover the material that will be on the final exam
Uploaded: 04/16/2016
20 Pages 105 Views 84 Unlocks
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