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Econ 13, 14.docx

9 Pages

Course Code
ECON 1000
George Georgopoulos

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Ch. 13: Monopoly  Monopoly: a market: o That produces a good or service for which no close substitutes exist o In which there is one supplier that is protected from competition by a barrier preventing the entry of new firms  Natural barrier to entry: creates a natural monopoly o Natural monopoly: an industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost  In a natural monopoly, economies of scale are so powerful that they are still being achieved even when the entire market demand is met.  The LRAC curve is still sloping downward when it meets the demand curve.  Ownership barrier to entry: if one firm owns a significant portion of a key resource  Legal barrier to entry: creates a legal monopoly o Legal monopoly: a market in which competition and entry are restricted by the granting of a public franchise, government licence, patent, or copyright  Public franchise: an exclusive right granted to a firm to supply a good or service  Like Canada Post  Government licence: controls entry into particular occupations  Licence to practise law or medicine  Patent or copyright: an exclusive right  Single-price monopoly: a firm that must sell each unit of its output for the same price to all its customers  Price discrimination: 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 Single-Price Monopoly  Price setter not a price taker o Demand for monopoly’s output is the market demand (one firm) o Total Revenue = Price x Quantity o MR < P 1  Marginal revenue is always less than price  Moving from a price of $16 to $14, the monopoly sells one extra unit. However, it loses $2 on the first two haircuts (2 x $2 = $4) and makes $14 on the extra unit. Therefore marginal revenue is $10 ($14 - $4 = $10)  Marginal revenue and elasticity o If demand is elastic a fall in price brings an increase in total revenue  If demand is inelastic a fall in price brings a decrease in total revenue  Total revenue is maximized when MR = 0  In a monopoly demand is always elastic  No point in producing in inelastic demand 2  Profit-maximizing point at MC = MR  Production efficiency when MSC = MSB (marginal social cost = marginal social benefit)  Monopoly: P >MSC , so MSB > MSC  Monopoly produces where MC = MR o 3  Monopoly is inefficient because it can charge more and produce less and make more profit  Some lost consumer surplus goes to producer surplus  Economic rent: any surplus – consumer surplus, producer surplus, economic profit  Rent seeking: pursuit of wealth by capturing economic rent o Buy a monopoly: transfers rent to creator of monopoly o Create a monopoly: uses resources in political activity  Lobbying and influencing politicians  Resources used in rent seeking can exhaust economic profit  Average total cost goes up and profits disappear Price Discrimination  To be able to price discriminate o Identify and separate different buyer types o Sell a product that cannot be resold  Price discrimination captures consumer surplus and converts is to economic profit  Firms can discriminate o Among groups of buyers  Advanced ticket sales, business travellers vs. vacation travellers o Among units of a good  Quantity discounts (not if discount for bulk purchase arises from lower costs of production) 4  Market research helps find different categories (of travellers) and different price levels increases economic profit  Perfect price discrimination: occurs if a firm is able to sell each unit of output for the highest price anyone I willing to pay for it o entire consumer surplus is eliminated o Demand curve becomes marginal revenue curve  Marginal revenue = price o The profit-maximizing output increases to the quantity at which price equals marginal
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