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Lecture #18 - Nov 21.docx

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Department
Economics
Course
Economics 1021A/B
Professor
Michael Parkin
Semester
Fall

Description
Nicole Wallenburg Economics Parkin Nov 21, 2011 Economics – Lecture #18 Monopoly and How It Arises A monopoly is a market:  That produces a good or service for which no close substitute exists  In which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. How Monopoly Arises A monopoly has two key features:  No close substitutes o If a good has a close substitute, even if it is produced by only one firm, that firm effectively faces competition from the producers of the substitute. o A monopoly sells a good that has no close substitutes.  Barriers to entry o A constraint that protects a firm from potential competitors are called barriers to entry. o Three types of barriers to entry are  Natural  Ownership  Legal  Natural Barriers to Entry o Natural barriers to entry create natural monopoly. o A natural monopoly is an industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost. o Figure 13.1 illustrates a natural monopoly. Monopoly Price-Setting Strategies © 2010 Pearson Education Canada For a monopoly firm to determine the quantity it sells, it must choose the appropriate price. There are two types of monopoly price-setting strategies:  A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers.20 Total revenue loss $4 Total revenue gain $14 Marginal revenue $10 Demand MR Quantity (haircuts per hour) 9 E Elastic 20 Unit elastic Inelastic D Quantity T per hour Maximum total revenue MR 20 (a) Demand and marginal revenue curves 20 MC ATC profit $12 Quantity (haircuts per hour) (b) Demand and marginal revenue and cost curves 20 Total revenue loss $4 Total revenue gain $14 Marginal revenue $10 Demand MR Quantity (haircuts per hour) 9 E Elastic 20 Unit elastic Inelastic D Quantity T per hour Maximum total revenue MR 20 (a) Demand and marginal revenue curves 20 MC ATC profit $12 Quantity (haircuts per hour) (b) Demand and marginal revenue and cost curves Nicole Wallenburg Economics Parkin Nov 21, 2011  Price discrimination is the practice of selling different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms. A Single-Price Monopoly’s Output and Price Decision Price and Marginal Revenue A monopoly is a price setter, not a price taker like a firm in perfect competition. The reason is that the demand for the monopoly’s output is the market demand. To sell a larger output, a monopoly must set a lower price.  Total revenue, TR, is the price, P, multiplied by the quantity sold, Q.  Marginal revenue, MR, is the change in total revenue that results from a one-unit increase in the quantity sold.  For a single-price monopoly, marginal revenue is less than price at each level of output. That is, o MR < P. TR gain – TR loss = Marginal Revenue In Monopoly, Demand Is Always Elastic A single-price monopoly never produces an output at which demand is inelastic. If it did produce such an output, the firm could increase total revenue, decrease total cost, and increase economic profit by decreasing output. Price and Output Decision  The monopoly faces the same types of technology constraints as the competitive firm, but the monopoly faces a different market constraint.  The monopoly selects the profit-maximizing quantity in the same manner as a competitive firm, where MR = MC.  The monopoly sets its price at the highest level at which it can sell the profit-maximizing quantity.Consumer MSC surplus Producer Efficient quantity D-MSB surplus Quantity (a) Perfect competition (b) Monopoly Consumer surplus MR Single-price poly: Higher S MC price and smaller output Perfect competition MR Quantity GM QC MSC Deadweight Producer surplus D MSB uanti ATC Consumer MC surplus Rent-seeking costs exhaust produce urplus Dead MR OSS uantity Consumer MSC surplus Producer Efficient quantity D-MSB surplus Quantity (a) Perfect competition (b) Monopoly Consumer surplus MR Single-price poly: Higher S MC price and smaller output Perfect competition MR Quantity GM QC MSC Deadweight Producer surplus D MSB uanti ATC Consumer MC surplus Rent-seeking costs exhaust produce urplus Dead MR OSS uantity Nicole Wallenburg Economics Parkin Nov 21, 2011 Single-Price Monopoly and Competition Compared Comparing Price and Output Figure 13.5 compares the price and quantity in perfect competition and monopoly. The market demand curve, D, in perfect competition is the demand curve that the firm in monopoly faces.
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