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What is a monopoly?
- Sole producer of a product with no close substitutes.
- A market in which a single firm sells a product that does not have any close substitutes.
What are the characteristics of a monopoly?
- 1. one seller
- 2. no close substitues
- 3. price maker
- 4. sinificant barriers
What is the relationship between price and marginal revenue in a monopoly?
Monopolist will not produce in what portion of the damand curve and why?
In the inelastic portion because marginal revenue is negative.
In a monopoly, total revenue is max at...
unitary elasticity because marginal revenue equals zero.
Why can monopolists earn an economic profit?
Because of the barriers to enter the market.
Define monopolistic competition.
A market served by many firms that sell slightly different productes.
What are the charateristics of a monopolistic competition?
- 1. relatively large number of firms
- 2. differentiated product
- 3. price maker
- 4. no significant barriers
How can you defferentiate a product?
- 1. Quality
- 2. Location
- 3. Packaging
- 4. Service
- 5. Advertising
If the demand curve slopes downward, what is the relationship between price and marginal revenue?
When do firms incur an economic loss and a economic profit?
- economic loss-when price is below average total cost
- economic profit-when price is above total cost
Monopolies have what type of demand?
More of an elastic demand.
Because there are no barriers, economic profit is a signal for what?
For new firms to enter the market in the long-run.
What is the relationship between price and avarage total cost when economic profit equals zero?
Is monopolistic conpetition effective?
No, because they don't produce where P=MC.
- A few firms donminate the market.
- A market served by a few firms.
What are the characteristics of an oligopoly?
- 1. more than 40%
- 2. standardized or differentiated product
- 3. significant barriers to entry
- 4. mutual interdependence
Define and give and example of Collusive.
- Firms formally get together to set price or output levels. ex. cartel, OPEC
- Firms that act in unison, coordinating their price and quantity decisions.
What are the non-collusive models?
- 1. Kinked Demand Curve
- 2. Price Leadership
- 3. Contestable Market Theory
Define Kinked demand curve model.
- Firms match a price decrease, but they tend to ignore price increase.
- A model in which firms in an oligopoly match price cuts by other firms, but do not mach pice hikes.
Define Price Leadership.
- Tend to have one large firm and several smanll firms where leader sets the price and others copy.
- A system under which one firm in an oligopoly take the lead in setting prices.
What is the Contestable Market Theory?
- A market with low entry and exit cost.
- Oligopoly that behaves like there are many firms (mobile capital)
What is HHI?
An index that measures the concentration of a market. It is calculated by squaring the market share of each firm in the market and the summing the resulting numbers. A market is "unconcentrated" if HHI is below 1000 and "highly concentrated" if it is above 1800.
Define Game Theory.
The study of decision makin inn strategic situations.
Define Price Discimination.
- Occurs when a firm chargers different pricesto different customers and those prices do not reflect differences in production prices.
- The practice of selling a good at different prices to different consumers.
What do you need in order to practice Price Discrimination?
- 1. Monopoly Power - control over price
- 2. Segment customer into groups (different elasticities)
- 3. Prevent Arbitrage (resale)