Chapter 15 vocabulary

Chapter 15 vocabulary - o monopoly A firm that is the sole...

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o monopoly A firm that is the sole seller of a product without close substitutes. o natural monopoly A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. o price discrimination The business practice of selling the same good at different prices to different customers. Chapter Recap: Summary o A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could. o Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly's marginal revenue is always below the price of its good. o Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. The monopoly then chooses the price at which that quantity is demanded. Unlike a competitive firm, a monopoly firm's price exceeds its marginal revenue, so its price exceeds marginal cost. o A monopolist's profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. That is, when the monopoly charges a price above marginal cost, some consumers who value the good more than its cost of production do not buy it. As a result, monopoly causes deadweight losses similar to the deadweight losses caused by taxes. o A monopolist often can raise its profits by charging different prices for the same good based on a buyer's willingness to pay. This practice of price discrimination can raise economic welfare by getting the good to some consumers who otherwise would not buy it. In the extreme case of perfect price discrimination, the deadweight loss of monopoly is completely eliminated, and all the surplus in the market goes to the monopoly producer. More generally, when price discrimination is imperfect, it can either raise or lower welfare compared to the outcome with a single monopoly price. o Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all. 1
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Chapter Recap: Questions for Review 1. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain. 2.
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Chapter 15 vocabulary - o monopoly A firm that is the sole...

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