Page 673 - Krugmans Economics for AP Text Book_Neat

Section 11 Summary

6. With sufficient time for entry into and exit from an in- market price, and the marginal revenue curve lies below
dustry, the long-run industry supply curve applies. the demand curve.
The long-run market equilibrium occurs at the inter- 10. At the monopolist’s profit-maximizing output level,
section of the long-run industry supply curve and the marginal cost equals marginal revenue, which is less
demand curve. At this point, no producer has an incen- than market price. At the perfectly competitive firm’s
tive to enter or exit. The long-run industry supply curve profit-maximizing output level, marginal cost equals
is often horizontal. It may slope upward if there is lim- the market price. So in comparison to perfectly compet-
ited supply of an input, resulting in increasing costs itive industries, monopolies produce less, charge higher
across the industry. It may even slope downward, as in prices, and can earn profits in both the short run and
the case of decreasing costs across the industry. But the the long run.
long-run industry supply curve is always more elastic
11. A monopoly creates deadweight losses by charging a
than the short-run industry supply curve.
price above marginal cost: the loss in consumer surplus
7. In the long-run market equilibrium of a competitive in- exceeds the monopolist’s profit. This makes monopo-
dustry, profit maximization leads each firm to produce lies a source of market failure and governments often
at the same marginal cost, which is equal to the market make policies to prevent or end them.
price. Free entry and exit means that each firm earns
12. Natural monopolies also cause deadweight losses. To
zero economic profit—producing the output correspon-
limit these losses, governments sometimes impose pub-
ding to its minimum average total cost. So the total cost
lic ownership and at other times impose price regula-
of production of an industry’s output is minimized.
tion. A price ceiling on a monopolist, as opposed to a
The outcome is efficient because every consumer with
perfectly competitive industry, need not cause shortages
willingness to pay greater than or equal to marginal cost
and can increase total surplus.
gets the good.
13. Not all monopolists are single-price monopolists.
8. The key difference between a monopoly and a perfectly
Monopolists, as well as oligopolists and monopolistic
competitive industry is that a single, perfectly competi-
competitors, often engage in price discrimination to
tive firm faces a horizontal demand curve but a monop-
make higher profits, using various techniques to differ-
olist faces a downward-sloping demand curve. This
entiate consumers based on their sensitivity to price
gives the monopolist market power, the ability to raise
and charging those with less elastic demand higher
the market price by reducing output.
prices. A monopolist that achieves perfect price dis-
9. The marginal revenue of a monopolist is composed of a crimination charges each consumer a price equal to
quantity effect (the price received from the additional his or her willingness to pay and captures the total sur-
unit) and a price effect (the reduction in the price at plus in the market. Although perfect price discrimina-
which all units are sold). Because of the price effect, a tion creates no inefficiency, it is practically impossible
monopolist’s marginal revenue is always less than the to implement.

Key Terms

Price-taking firm’s optimal output rule, p. 585 Short-run industry supply curve, p. 600 Price regulation, p. 619
Break-even price, p. 592 Short-run market equilibrium, p. 601 Single-price monopolist, p. 624
Shut-down price, p. 593 Long-run market equilibrium, p. 602 Price discrimination, p. 624
Short-run individual supply curve, p. 594 Long-run industry supply curve, p. 603 Perfect price discrimination, p. 627
Industry supply curve, p. 599 Public ownership, p. 619

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