Economics 10: Monopolies, Oligopolies and Externalities – Flashcards

a firm that is the only seller of a good that does not have a close substitute; price makers (can choose both quantity to produce and price, unlike firms in a perfectly competitive market)

1. control of natural resources and key inputs needed to produce the good 2. government-produced barriers like patents and copyrights to encourage research and innovation 3. natural monopoly has economies of scale and it's more efficient for one firm to produce a good (move down ATC) than it is for more than one firm (present when FC > VC) 4.

The monopoly's demand curve is the same as the demand curve for the market; it is downward-sloping. The marginal revenue curve is below the demand curve at every point because when a firm increases production by one unit, it gains TR by the amount of what the customer is paying for this new unit but loses by (original price-new price)*Q sold originally.

1. find quantity where MR = MC (if MR > MC, then you should produce one more unit...until the two are equal) 2. look at the demand curve and choose the price you can charge at this quantity demanded (The profit will never be negative in the short run and in the long run, profits can stay positive.)

A monopoly will produce less and charge more than a firm in a perfectly competitive market selling the same good. In a monopoly, P > MC (monopoly power) which creates a deadweight loss (as difference between P and MC shrinks, the DWL shrinks); shrinks consumer surplus; increases producer surplus.

set a price ceiling so that the monopoly doesn't abuse its market power to minimize the difference between P and MC but making sure that the monopoly has break even profit

when a firm charges different prices for the same product to different people because the firm is faced with demand curves of varying elasticity (for elastic curves, charge a lower price) (reduces DWL from monopolies that only charge one price)

when every different consumer pays their willingness to pay (a different price) so CS = 0 and producer surplus is maximized (efficient but not equitable)

market with only a few firms because there are barriers to entry so firms still earn an economic profit over a long period (imperfect competition because no one firm holds a monopoly, but producers can still affect market prices)

a strategy that is the best for a firm no matter what the other firm does

a situation in which each firm chooses their dominant strategy (the best strategy for a firm, given the strategy chosen by the other firm)

If firms play the game once, they will always end up at the nash equilibrium. But if they interact repeatedly, they might collude (agree to cooperate) for greater benefits by adopting tit-for-tat strategies ("if you lower your price, I will too").

the uncompensated impact of one person's actions on the well-being of a bystander (both positive or negative); market equilibrium does not account for the costs or benefits of an externality and is therefore inefficient (creates a DWL)

marginal social cost is greater than marginal private cost by the value amount of the externality (shifted up by the value amount of the externality); creates a deadweight loss because of over-production

to reduce inefficiency, the government can levy a tax on producers OR consumers by the amount of the externality (called corrective taxes)

marginal social benefit is greater than the marginal private benefit by the value amount of the externality (shifted up by the value amount of the externality); underproducing creates a deadweight loss

to reduce inefficiency, the government can grant subsidies to consumers OR producers by the amount of the externality (called corrective subsidies)

The marginal benefit of reducing pollution decreases as the level of reduction increases since if you've already reduced pollution by a lot, reducing it by more will have less and less additional benefit. But the marginal cost of reducing pollution increases as the level of pollution reduction increases since better technology is expensive. Individuals want to find the intersection of MB and MC, so they make agreements with firms in which they give the firm the total cost to alter their level of pollution reduction. The net benefit = total benefit (area under the marginal benefit curve) - total cost (area under the marginal cost curve).

the cost in time and resources that is incurred when negotiating a private agreement