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Key characteristics of a monopoly
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see attachment
Just answer the questions
Final_Exam_Notes___ECO2023_(2).doc
Notes on Final Exam:
Key characteristics of a monopoly (# of sellers, what the demand and supply curve looks like, etc.)
What are legal barriers to entry and know some examples
Know the definition of a natural monopoly
You should be familiar with the characteristics of a single-price monopoly firm, in terms of the marginal revenue and demand curve characteristics
You should be able to calculate marginal revenue if given some numbers such as # of units sold, price per unit
What level will a monopolist charge in order to maximize profits?
What is economic or monopoly rent?
What is perfect price discrimination?
In a monopolistically competitive market, what factors give rise to product differentiation?
What does the demand curve look like for a monopolistic competitor?
What output level exists for a firm in a monopolistically competitive industry?
What is mutual interdependence and what does it imply?
What does concentration ratio mean and how it is calculated?
What are the premises behind kinked demand theory in an oligopolistic market structure?
What is the price leadership theory?
What does the prisoner's dilemma game illustrate?
What assumption would preclude economic profits in monopolistic competition in the long-run? (that's a mouthful!)
What level of production exists for a profit-maximizing oligopolist?
Why does antitrust law exist?
What is exclusive dealing?
What is an interlocking directorate?
Under what circumstances does a natural monopoly exist?
What are some of the ways of regulating the natural monopoly firm?
What does the term regulatory lag refer to?
Be able to explain the capture theory of regulation.
What is the public interest theory of regulation?
What is the primary intent of antitrust legislation?
What does the term "derived demand" mean?
Know the definitions of marginal revenue product and marginal factor cost.
For each type of firm (monopolist, monopolistic competitor, olgigopolist, perfectly competitive), you should know what output level will allow them to maximize profits.
You should know some reasons why wage rates differ.
What types of individuals comprise an industrial worker's union?
Under what circumstances will an industrial union be successful?
What are some of the objectives of labor unions?
When are "in kind" transfer payments made?
What is the Lorenz curve?
Be familiar with the Gini coefficient.
What are some ways to reduce the degree of income inequality?
What is the marginal productivity normative standard and what does it state?
What does the term "roundabout methods of production" refer to?
What is the relationship between the risk associated with a loan and the interest rate and likelihood that the loan will be granted?
What is economic rent?
Again, Happy Studying!!
Chapter 21 Perfect Competition
The MR curve of a PC firm is the same as its demand curve (DC):
For a PC firm:
It follows that if price is equal to MR for PC, then the MR curve is the same as the DC.
Profit Maximization rule for PC: or just
For PC, if: continue to produce in short run.
For PC, if: shut down in short run.
For PC, if: continue to produce in the short run.
In summary, a firm should produce as long as:
or
Conditions for long term EQ:
Chapter 22 Monopoly
For a monopolist:
and
For Monopoly, quantity produced is equal to: @ the highest price that that Q will bring. Welfare triangle: See text pg. 516 for best study.
Chapter 23 Monopolistic Competition & Oligopoly
Excess Capacity Theorem:
A monopolistic firm in EQ produces an output less than one that would minimize production cost.
Chapter 24 Antitrust
Herfindahl index and Concentration ratios: Just understand how the theories are supposed to work. Pgs. 533 & 555
Chapter 26 Factor Markets
Marginal Revenue Product:
and/or
Value Marginal Product:
and also given that and because for PC and therefore for PC. Uggg. ‘'
Marginal Factor Cost:
Elasticity of Labor:
Study pg. 608 for multiple compositions of the different formulas.
Essay Sample Content Preview:
Running Head: Economics
Economics
Name
High School
Course
Teacher
Date
Key characteristics of a monopoly.
A monopoly is a market situation in which one seller has control over a product such that he is able to deny access to competing firms in the market through his actions. Another basis for monopoly could be restrictions on the production of a certain commodity by the government. The absence of competition enables a monopolizing firm to control prices in a market, but prices have to be set in such a way that can still prevent the entry of new firms in the market. Another characteristic of a monopoly is lack of innovation due to the fact that there is no pressure from competing firms. Lack of competition is another major characteristic of monopoly as there are no competitor firms present in the market. The threat of legal sanctions is also a present feature in a monopoly as these are put in place by the government to prevent abuse of power by the monopolizing firm. The demand curve of a monopolist sloped downward from left to right. (Clayton, Gary. 2001)
What are legal barriers to entry?
Barriers to entry have the intention of limiting potential entrants from entering a market. They aim to protect a monopolizing firm’s presence in an industry so that it can continue to earn profits. Examples of such barriers to entry include: patents which give the firm a legal justification to produce a product exclusively over a period of time. Another barrier to entry is government policy which allows only a single firm to sell a commodity or service e.g. postal services in America. High cost of capital in some industries also acts as a barrier to entry. If one single firm has control over resources that are crucial for operation in that industry then it can make it difficult for other firms to operate in that industry. (Clayton, Gary. 2001)
Definition of a natural monopoly? A natural monopoly is a situation where the largest seller in a market. Often the first mover in an industry has an overwhelming advantage over potential competitors due to the high capital costs involved in setting up operations in that industry. These costs create economies of scale that’s act as a barrier to new entrants into an industry. An example of a natural monopoly is the provision and supply of electricity or railways.
Characteristics of a single-price monopoly firm, in terms of the marginal revenue and demand curve. A single price monopoly firm is a monopolizing firm that sells its commodity to all buyers within a market at a similar price. This situation arises when the monopolizing firm feels that price discrimination might result in a few sellers exploiting the market by buying at a lower price in one area and selling at a higher price in another. (Clayton, Gary. 2001)
What is economic or monopoly rent? Economic rent is a payment that is paid to a factor production to keep it in use. The amount paid is usually in excess of the true value of that factor. It means obtaining compensation from others for that factor without contributing to its productivity.
What is perfect price discrimination? This is a situation where a seller is able to charge the highest price that different buyers are able and willing to pay for a commodity. In essence different prices will be charged to different buyers based on their location, age, income etc.
In a monopolistically competitive market, what factors give rise to product differentiation? Desire to influence demand by marketing a product as being different or more superior as compared to its close substitute.
What does the demand curve look like for a monopolistic competitor? The demand curve in a monopolistic market is negatively sloped. In that it slopes downward from left to right. It is also relatively inelastic.
What output level exists for a firm in a monopolistically competitive industry? The output level of firms in a monopolistically competitive industry is low due the fact that no single firm controls the market and products are substitutes of each other. The main aim of the firms here is to produce an output that will enable profit maximization. (Clayton, Gary. 2001)
What is mutual interdependence and what does it imply? Mutual interdependence is a situation that can be found in an oligopoly. The concept implies that a firm realizes that its actions will have an effect on the reactions, actions and choices of other firms within the industry. For example a decrease in price by one firm might result in a price war and decreased profits for all sellers in the market.
What does concentration ratio mean and how it is calculated? Concentration ratios are used to measure the total output of firms that exist in a given industry. These ratios are used to establish whether a market is controlled by a small number of large sellers or a large number of smaller sellers. The two most common ratios used are: the eight firm concentration ratio which seeks to establish the market share of the eight largest sellers in an industry and the four firm concentration ratio that seeks to show the market share of the four largest sellers in a market.
What are the premises behind kinked demand theory in an oligopolistic market structure? The kinked demand curve theory states that a seller faces a dual demand curve for his product based on the reactions of other sellers in the market to changes in the price charged for his firm’s product. The theory assumes that other sellers are likely not to match any price increases due to the fact that they are protecting their market share. The sellers are however likely to match any fall in price. (Clayton, Gary. 2001)
What is the price leadership theory? The price leadership theory states that one firm, which is the most dominant in the industry establishes the market price and all other sellers who have no option but accept the price as it is.
What does the prisoner's dilemma game illustrate? Prisoner’s dilemma is a model of the game theory. It is explained as a situation whereby two players have to make a choice between two actions with the knowledge that the opponent’s choice will have effect on their decision. The dilemma seeks to analyze how certain firms in an oligopoly seek to gain an advantageous position by strategically anticipating the actions of competitor firms. This is necessary as the market is mutually interdependent.
What assumption would preclude economic profits in monopolistic competition in the long-run?
In the long-run a monopolistically competitive firm can only make zero economic profits, and for this to happen demand will decrease and the average total cost will increase, such that average revenue will be equal to average cost resulting in zero average profit.
What level of production exists for a profit-maximizing oligopolist? Because a profit maximizing oligopolist cannot be able to produce as much as he wants, the level of production will be fixed by a cartel that sets quotas for each and every seller in the market. E.g. OPEC.
Updated on
Economics
Name
High School
Course
Teacher
Date
Key characteristics of a monopoly.
A monopoly is a market situation in which one seller has control over a product such that he is able to deny access to competing firms in the market through his actions. Another basis for monopoly could be restrictions on the production of a certain commodity by the government. The absence of competition enables a monopolizing firm to control prices in a market, but prices have to be set in such a way that can still prevent the entry of new firms in the market. Another characteristic of a monopoly is lack of innovation due to the fact that there is no pressure from competing firms. Lack of competition is another major characteristic of monopoly as there are no competitor firms present in the market. The threat of legal sanctions is also a present feature in a monopoly as these are put in place by the government to prevent abuse of power by the monopolizing firm. The demand curve of a monopolist sloped downward from left to right. (Clayton, Gary. 2001)
What are legal barriers to entry?
Barriers to entry have the intention of limiting potential entrants from entering a market. They aim to protect a monopolizing firm’s presence in an industry so that it can continue to earn profits. Examples of such barriers to entry include: patents which give the firm a legal justification to produce a product exclusively over a period of time. Another barrier to entry is government policy which allows only a single firm to sell a commodity or service e.g. postal services in America. High cost of capital in some industries also acts as a barrier to entry. If one single firm has control over resources that are crucial for operation in that industry then it can make it difficult for other firms to operate in that industry. (Clayton, Gary. 2001)
Definition of a natural monopoly? A natural monopoly is a situation where the largest seller in a market. Often the first mover in an industry has an overwhelming advantage over potential competitors due to the high capital costs involved in setting up operations in that industry. These costs create economies of scale that’s act as a barrier to new entrants into an industry. An example of a natural monopoly is the provision and supply of electricity or railways.
Characteristics of a single-price monopoly firm, in terms of the marginal revenue and demand curve. A single price monopoly firm is a monopolizing firm that sells its commodity to all buyers within a market at a similar price. This situation arises when the monopolizing firm feels that price discrimination might result in a few sellers exploiting the market by buying at a lower price in one area and selling at a higher price in another. (Clayton, Gary. 2001)
What is economic or monopoly rent? Economic rent is a payment that is paid to a factor production to keep it in use. The amount paid is usually in excess of the true value of that factor. It means obtaining compensation from others for that factor without contributing to its productivity.
What is perfect price discrimination? This is a situation where a seller is able to charge the highest price that different buyers are able and willing to pay for a commodity. In essence different prices will be charged to different buyers based on their location, age, income etc.
In a monopolistically competitive market, what factors give rise to product differentiation? Desire to influence demand by marketing a product as being different or more superior as compared to its close substitute.
What does the demand curve look like for a monopolistic competitor? The demand curve in a monopolistic market is negatively sloped. In that it slopes downward from left to right. It is also relatively inelastic.
What output level exists for a firm in a monopolistically competitive industry? The output level of firms in a monopolistically competitive industry is low due the fact that no single firm controls the market and products are substitutes of each other. The main aim of the firms here is to produce an output that will enable profit maximization. (Clayton, Gary. 2001)
What is mutual interdependence and what does it imply? Mutual interdependence is a situation that can be found in an oligopoly. The concept implies that a firm realizes that its actions will have an effect on the reactions, actions and choices of other firms within the industry. For example a decrease in price by one firm might result in a price war and decreased profits for all sellers in the market.
What does concentration ratio mean and how it is calculated? Concentration ratios are used to measure the total output of firms that exist in a given industry. These ratios are used to establish whether a market is controlled by a small number of large sellers or a large number of smaller sellers. The two most common ratios used are: the eight firm concentration ratio which seeks to establish the market share of the eight largest sellers in an industry and the four firm concentration ratio that seeks to show the market share of the four largest sellers in a market.
What are the premises behind kinked demand theory in an oligopolistic market structure? The kinked demand curve theory states that a seller faces a dual demand curve for his product based on the reactions of other sellers in the market to changes in the price charged for his firm’s product. The theory assumes that other sellers are likely not to match any price increases due to the fact that they are protecting their market share. The sellers are however likely to match any fall in price. (Clayton, Gary. 2001)
What is the price leadership theory? The price leadership theory states that one firm, which is the most dominant in the industry establishes the market price and all other sellers who have no option but accept the price as it is.
What does the prisoner's dilemma game illustrate? Prisoner’s dilemma is a model of the game theory. It is explained as a situation whereby two players have to make a choice between two actions with the knowledge that the opponent’s choice will have effect on their decision. The dilemma seeks to analyze how certain firms in an oligopoly seek to gain an advantageous position by strategically anticipating the actions of competitor firms. This is necessary as the market is mutually interdependent.
What assumption would preclude economic profits in monopolistic competition in the long-run?
In the long-run a monopolistically competitive firm can only make zero economic profits, and for this to happen demand will decrease and the average total cost will increase, such that average revenue will be equal to average cost resulting in zero average profit.
What level of production exists for a profit-maximizing oligopolist? Because a profit maximizing oligopolist cannot be able to produce as much as he wants, the level of production will be fixed by a cartel that sets quotas for each and every seller in the market. E.g. OPEC.
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