Chapter 15 Monopoly.docx
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Chapter 15 Monopoly
Monopoly: A firm that is the sole seller of a product without close substitutes.
A monopoly is a price maker.
Monopolies arise when there are:
Monopoly Resources: A key resource is owned by a single firm.
For example, a water well in a small town long ago.
Government-Created Monopolies: The government gives a single firm the exclusive right to produce
some good or service.
Through patents, whoever holds the patent holds a monopoly of that product or good for the time the
patent is in effect.
Natural Monopolies: A single firm can produce output at a lower cost than can a large number of
The main difference between a competitive firm and a monopoly is that a competitive firm is a price
taker whereas the monopoly is the price maker.
In a perfectly competitive market the demand curve is perfectly elastic, this is because there is not going
to be a change in price. Where a monopoly can effect demand by changing the price so the demand curve
in a monopoly, if they raise the price the will expect a lower demand.
A Monopoly’s Revenue
A monopolist’s marginal revenue is always less then the price of the good.
When a monopoly raises the amount it sells, it has two effects on total revenue.
The Output Effect: More output is sold, so Q is higher, which tends to increase total revenue.
The Price Effect: The price falls, so this tends to decrease total revenue.
A monopoly maximizes profit by choosing the quantity at which marginal revenue equals marginal cost.
It then uses the demand curve to find the price that will induce consumers to buy that quantity.
In monopolies, price exceeds marginal cost, whereas in competitive markets they are equal.
A monopolists profit is equal to the difference between monopoly price and average total cost times the
number of units sold.
The Welfare Cost of Monopoly
There is going to be a lack of total economic well being as it is not the invisible hand that is finding the
equilibrium but the monopolist.
The deadweight loss is equal to the area to the left of a natural equilibrium (where the marginal cost
equals the demand) and to the right of the monopoly quantity.
Price Discrimination: The business practice of selling the same good at different prices to different
For a firm to price discriminate it must have market power.
Arbitrage: The process of buying one good in one market and turning around and selling it in another
market at a profit.
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