CAS EC 101 Lecture Notes - Lecture 9: Electricity Delivery, Regional Policy Of The European Union, Perfect Competition
CHAPTER 15: MONOPOLY
Objective 1: Summary of a Market Structure ā Perfect Competition
ā¢ Characterized by:
o very many firms
o identical output between firms
o price takers
āŖ No one individual firm can have an influence over price
āŖ Each firm must take the market given price
o no barriers to entry/exit
o Formulas ā
āŖ MR = MC = P
āŖ q* is at the minimum AC point
o positive/zero/negative short-run profit
o zero long-run profit
o no need for advertising
āŖ Firms will sell as much as they can produce so there is no need for this
extra effort
Objective 2: Conditions for a Monopoly
ā¢ There can only be one seller
ā¢ There are barriers against other firms entering
o This leads to the sources of monopoly
Objective 3: Sources of Monopoly
ā¢ A government grant of a monopoly (ex: AT&T providing long-distance services, airport
restaurants that only allow for one company per food type)
o Public Franchise ā a government designation that a firm is the only legal provider
of a good or service
o Patents/Copyrights ā an exclusive right held by a firm to be the only producer of a
certain goods
āŖ Can be held for a distinct length of time
ā¢ The sole ownership or control of a scarce resource (ex: diamond companies who own the
land/mines in order to produce these goods)
ā¢ Network Externalities ā a product characteristic where the value/utility of a product
increases with the number of consumers who use it (ex: Microsoft and PCs, social
network sites, computer operating systems)
o This can lead to a Virtuous Cycle ā when the sum of a firmās product continues to
increase along with the price (which it has the ability to charge)
o Consumers may find themselves locked into an inferior product
ā¢ Natural Monopoly ā when economies of scale are so large that one firm can supply the
entire market at a lower average total cost than two or more firms (ex: electricity
delivery, when a single firm can deliver electricity at a lower cost than can two firms)
o Essentially, as a firm makes more money the lower their costs will be
o These are most likely when fixed costs are high
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o
o Average cost will be downwards sloping for
Objective 4: Demand & Marginal Revenue Curves
ā¢ Demand Curves
o Perfectly Competitive Firm ā horizontal demand curve where AR = P*
o Monopoly ā downwards sloping demand curve
ā¢ Marginal Revenue Curves
o Perfectly Competitive Firm ā horizontal marginal revenue curve where MR = AR
= P*
āŖ Important to note that this is the same as the demand curve for a perfectly
competitive firm
o Monopoly ā downwards sloping marginal revenue curve with a slope twice as
steep
āŖ
āŖ Important to note that the demand curve and marginal revenue curve will
share the same vertical intercept but have different slopes
ā¢ ex: Jason Bourne DVDs
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find more resources at oneclass.com
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