Microeconomics Chap 15 – Flashcards
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What is a monopoly?
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A monopoly is a firm that is the only seller of a good or service that does not have a close substitute
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What is a characteristic that supports a firm being classified as a monopoly?
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It earns profits in the long run
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What are the four most important ways a firm becomes a monopoly?
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1.) The govt blocks entry
2.) Control of a key resource
3.) Network Externalities
4.) Economies of scale
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If patents reduce competition, why does the federal government grant them?
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The federal government grants patents to encourage firms to spend money on research to create new products
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What is a public franchise?
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A public franchise is a firm designated by the government as the only legal provider of a good or service
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Are all public franchises natural monopolies?
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All public franchises are not natural monopolies, and all natural monopolies are not public franchises
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What is "natural" about a natural monopoly?
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A natural monopoly develops automatically due to economies of scale
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What is economies of scale?
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When a firm's long-run average costs fall as it increases the quantity of output it produces, a saving in costs gained by an increased level of production
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When is an industry a natural monopoly?
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When 1 firm can satisfy the entire market at the lowest cost
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How might the govt affect whether a firm is a monopoly?
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The govt could grant a firm a public franchise, making it the exclusive legal provider of a good or service
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One of the reasons why monopolies exist is because the govt blocks the entry of more than 1 firm into a market, How does the govt do this?
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The govt could block entry by issuing copyrights granting the exclusive right to use a creation during the creators lifetime
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To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalities create or remove barriers to entry?
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Network externalities create barriers to entry b/c if a firm can attract enough customers initially, it can attract additional customers as its products value increases by more ppl using it which attracts even more customers
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How do network externalities affect barriers to entry?
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Network externalities serve as barriers to entry b/c new products are less useful
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Why does the govt issue patents?
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The govt issues patents to encourage firms to spend money on the research and development necessary to create new products (Patents last for 20 years)
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Many firms might like to be monopolies b/c such firms earn economic profits in the long run, What might cause a monopoly?
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A firm is likely to be a monopoly if there are important network externalities in supplying the good or service
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Why might a monopoly arise? One firm will be present when
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Only 1 firm has control of a key raw material necessary to produce a good
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How can the govt block entry to a market?
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1.) Public franchise
2.) Patent
3.) Copyright
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Which rights is given to the holder of a patent?
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The exclusive right to a new product for a limited period
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Can a firm become a monopoly by controlling a key resource?
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Yes
