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Lecture 17

ECO1104 Lecture 17: Monopoly

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University of Ottawa
Cristina Blanco- Perez

March 30th Monopoly Daniel - The following are two characteristics of a monopoly. - A firm that is the sole seller of a product. - The product it sells has no close substitutes. - Unlike in a perfect competition a monopolist has market power. - Market Power: the ability to influence the market price of the product it sells. - The main cause of monopolies is barriers to entry, which are threefold: - A single firm owns a key resource. - The government gives a single firm the exclusive right to produce the good (patents, copyright laws). - Natural monopoly (A single firm can produce the entire market Q at lower cost than could several firms). - In a competitive market, market demand curves slopes downward. - Do not confuse “market” and “individual firm”. - In a competitive market, individual firm’s demand is horizontal. - In a monopoly, the demand curve slopes downward, because by definition, to be a monopoly, one must be an “individual firm”. - Increasing Q has two effects on a monopolist’s Marginal Revenue: - Output Effect: higher output raises revenue. - Price Effect: lower price reduces revenue. - A competitive firm has an output effect, but not a price effect. - Like a competitive firm, a monopolist maximizes profit by producing the quantity where MR = MC. - Once the monopolist identifies this quantity, it sets the highest price consumers are willing to pay for that quantity March 30th Monopoly Daniel - There is no supply curve for a monopoly because it is a “price-maker,” not a “price-taker” (Q does not depend on Price). - By charging higher prices, the monopoly gets more surplus and consumers get le
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