ECON101 Lecture Notes - Lecture 10: Oligopoly, Profit Maximization, Marginal Revenue

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Monopoly
Definition
Market structure or industry composed of one firm
Critical assumptions
Since there is only one firm in the industry, the industry in effect = the firm
There are no perfect substitutes for the commodity that the company
supplies
Firm has complete knowledge of current and future market conditions
Goal of the firm is to maximize profits, and if the monopolists are going to
maximize profits, must push marginal revenue = marginal cost
With the respect to exit, monopoly is free to leave industry, industry
disappears;
Entry however is blocking, barriers to entry contribute to the
formation and sustainability of monopoly market structures
Barriers to entry
Firm is offered a market franchise, firm is given the privilege of offering (the
only entity allowed to offer) the product in a particular jurisdiction
Patent: company gets patent on method of production or product, this means
the company is the only business able to supply the product in the
jurisdiction
Require input in production: if a company has sole access to require input in
production, the product of that input is the only one
Significant money capital requirements can act as a deterrent to entry
Cost advantage can be a strong barrier to entry 4
Limit pricing: set the price above monopoly cost,
Nov 23rd
Relevant schedule and accompanying curve
Demand: price goes up, quantity of demand goes up + negatively sloped 1
Marginal revenue (MR): because demand is negatively sloped, the marginal
revenue is negatively sloped + located below the demand curve
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