Microeconomics Cheat Sheet
Market Structure | NumberofSellers | TypeofProduct | BarrierstoEntry? | DemandCurve | Profit Maximization Condition | Perfect Competition | Many | Homogenous | No | Horizontal (perfectly elastic) | MR = MC | Monopoly | One | Unique | Yes | Downward Sloping | MR = MC | Monopolistic Competition | Many | Differentiated | No | Downward Sloping | MR = MC | Oligopoly | Few | Homogenous or Differentiated | Yes | Downward Sloping | MR = MC |
The natural monopoly may be regulated through price, profit, or output regulation.
Price regulation — Marginal cost pricing is one form of price regulation, where the monopolist’s price is set equal to marginal cost at the quantity of output at which demand intersects marginal cost. The problem with marginal-cost pricing is that it usually results in the monopolist suffering a loss—a result that cannot be sustained for long.
Profit regulation — A second possibility is to limit the monopolist to zero economic profit, either by taxing all economic profits away or by using average-cost pricing, which requires the monopolist to charge a price equal to average total cost. The problem here is that the monopolist has no incentive to minimize costs, since it will be allowed to pass all costs on to customers and gains no additional benefit by being cost-efficient.
Output regulation — The third possibility is for government to mandate a quantity of output it wants the natural monopoly to produce. — The government can assure a particular level of output, and the monopolist can gain additional economic profits by lowering its costs.
Briefly discuss the Capture, Public Interest, Public Choice theories of regulation.
The Capture Theory of Regulation—This theory states that no matter what the motive for the initial regulation, eventually the agency responsible for the regulation will be “captured” (controlled) by the industry that is being regulated. As a result, the regulatory measures enacted will be affected by this relationship. Four points
The natural monopoly may be regulated through price, profit, or output regulation.
Price regulation — Marginal cost pricing is one form of price regulation, where the monopolist’s price is set equal to marginal cost at the quantity of output at which demand intersects marginal cost. The problem with marginal-cost pricing is that it usually results in the monopolist suffering a loss—a result that cannot be sustained for long.
Profit regulation — A second possibility is to limit the monopolist to zero economic profit, either by taxing all economic profits away or by using average-cost pricing, which requires the monopolist to charge a price equal to average total cost. The problem here is that the monopolist has no incentive to minimize costs, since it will be allowed to pass all costs on to customers and gains no additional benefit by being cost-efficient.
Output regulation — The third possibility is for government to mandate a quantity of output it wants the natural monopoly to produce. — The government can assure a particular level of output, and the monopolist can gain additional economic profits by lowering its costs.
Briefly discuss the Capture, Public Interest, Public Choice theories of regulation.
The Capture Theory of Regulation—This theory states that no matter what the motive for the initial regulation, eventually the agency responsible for the regulation will be “captured” (controlled) by the industry that is being regulated. As a result, the regulatory measures enacted will be affected by this relationship. Four points