Reading notes--Principles of Economics (chapter15)

Review

The chapter 15 is Monopoly. This chapter introduces the situation of monopoly.

• Monopoly is the situation when a firm that is the sole seller of a product without any close substitutes.

• Natural monopoly is a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

• A monopolist’s marginal revenue is less than the price of its good because of the downward-sloping demand curve.

Profit maximization

• Find the Q at which MR = MC.
• On the demand curve, find P at which consumers will buy Q.
• If P > ATC, the monopoly earns a profit.

For a competitive firm: P=MR=MC

For a monopoly firm: P>MR=MC

The deadweight loss

• A benevolent social planner maximizes total surplus in the market by choosing the level of output where the marginal cost curve and demand curve intersect.

• Because a monopoly charges a price above the marginal cost, not all consumers who value the good at more than its cost buy it. It causes the deadweight loss.

Price discrimination

• Price discrimination is the business practice of selling the same good at different prices to different customers.

• Because different consumers have different willingnesses to buy the same good, the price discrimination increases the total surplus.

Differences between Competition and Monopoly

Definitions

1.Monopoly– a firm that is the sole seller of a product without any close substitutes

2.Natural monopoly– a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

3.Price discrimination– the business practice of selling the same good at different prices to different customers

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. If a monopoly’s fixed costs increase, its price will_____ and its profit will_____. (Correct answer: D）

a. increase; decrease

b. decrease; increase

c. increase; stay the same

d. stay the same; decrease

My wrong answer: A

2. The deadweight loss from monopoly arises because_____. (Correct answer: B)

a. the monopoly firm makes higher profits than a competitive firm would

b. some potential consumers who forgo buying the good value it more than its marginal cost

c. consumers who buy the good have to pay more than marginal cost, reducing their consumer surplus

d. the monopoly firm chooses a quantity that fails to equate price and average revenue

My wrong answer: D

3. Antitrust regulators are likely to prohibit two firms from merging if_____. (Correct answer: C)

a. there are many other firms in the industry

b. there are sizable synergies to the combination

c. the combined firm will have a large share of the market

d. the combined firm will undercut competitors with lower prices

My wrong answer: A