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The Ramsey problem, or Ramsey pricing, or Ramsey–Boiteux pricing, is a second-best policy problem concerning what prices a public monopoly should charge for the various products it sells in order to maximize social welfare (the sum of producer and consumer surplus) while earning enough revenue to cover its fixed costs.
The consumer's surplus is highest at the largest number of units for which, even for the last unit, the maximum willingness to pay is not below the market price. Consumer surplus can be used as a measurement of social welfare, shown by Robert Willig. [8] For a single price change, consumer surplus can provide an approximation of changes in welfare.
While it is generally agreed that minimum wage price floors reduce employment, [9] economic literature has yet to form a consensus regarding the effects in the presence of monopsony power. [6] Some studies have shown that if monopsony power is present within a labour market the effect is reversed and a minimum wage could increase employment.
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. Specifically, an industry is a natural monopoly if the total cost ...
English: An illustrative supply/demand graph, showing a price floor that has caused a market surplus (shaded in light blue). Line D (red) represents the demand (price vs. quantity demanded), line S (blue) represents the supply (price vs. quantity supplied), point E (black) is the equilibrium point, and line F (green, dashed) represents the price floor.
In the first graph at right, the dashed green line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears and is using a higher price. An effective, binding price floor, causing a surplus (supply exceeds demand)
The clearest example is a monopoly, where a single producer has complete control over supply and can extract a monopoly price. An oligopoly - a small number of producers - can also sustain an undersupply if no producers attempt to gain market share with lower prices at higher volume. Lack of supply competition can arise in many different ways:
Since the firm is no longer a price taker, the price it charges will be above the (now lower) unit cost. For a monopoly, for example, the price will be set where the unit/marginal cost intersects marginal revenue. This means that the amount of consumer surplus, the area below the demand curve and above the price, will be lower. [4]