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Lecture 13

ECON 20A Lecture 13: Lecture 13

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William Branch

Lecture 13 I. Overview a. Monopoly a firm that is the sole seller of a product without a close substitute b. Some firms are the only manufacturer of a product i. Apple only makes iPhones c. Monopolists do not behave like competitive firms d. Competitive firms produce at point where MC = P. For Apple, MC of iPhone is about 300, but sell for about 700, so P > MC II. Why do monopolies exist? a. Typically, barriers to entry prevent other firms from entering and competing away some profits b. Where do barriers come from? i. Monopoly resources a single firm owns a key resource ii. Government created monopolies government gives one person the exclusive right to sell some good or service 1. Patents sole right to manufacture for 20 years 2. Copyright 3. Used when government wants to encourage risky investment iii. Natural monopolies monopoly arises because a single firm can supply a good or service to an entire market at the lowest cost than two or more firms 1. If one company has economies of scale their average total cost decreases as the quantity produced increases 2. Thus, better to have one company with low average cost than a bunch of smaller firms selling at a higher average cost 3. Example: electricity, cable 4. Natural monopolies do not require government protection since potential entrants know they cant produce at a smaller cost than the natural monopoly III. Monopolist productionpricing decisions a. Competitive firms are price takers b. Monopolists can affect price by lowering production c. Can see how the demand for a single firms produce differs between competitive market and a monopoly d. Competitive firm has a horizontal demand curve, but a monopolist firm has a downward sloping demand curve e. Table: Demand for Toms coconuts Q P Total Revenue Average Marginal Revenue Revenue 0 7 0 1 6 6 6 6 2 5 10 5 4 3 4 12 4 2
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