ECON 208 Chapter Notes - Chapter 10: Price Discrimination, Arbitrage, Perfect Competition

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Chapter 10 - Monopoly, Cartels, and Price Discrimination
Monopoly a market containing a single firm
Monopolist a firm that is the only seller in a market
Entry Barrier any barrier to the entry of new firms into an
industry. May be natural or created.
Natural Monopoly an industry characterized by economies of
scale sufficiently large that only one firm can cover its costs
while producing at its minimum efficient scale
Cartel an organization of producers who are to act as a single
seller in order to maximize joint profits
Price Discrimination the sale by one firm of different units of
a commodity at two or more different prices for reasons not
associated with differences in cost
Monopolist faces a negatively sloped demand curve
-market demand curve
Monopolist charges the same price for all units sold
TR = p x Q
Demand curve is also average revenue curve
AR = TR/Q = p
Marginal Revenue curve is below the demand curve
MR = ΔTR/ΔQ
MR is less than price because
the price must be reduced on all
units in order to sell an additional
unit
Green area: $40 loss in revenue
associated with reducing the
price by $1 on original 40 units
Purple area: $50 gain in revenue
associated with 10 extra units
sold at $5 each
Short-Run Profit Maximization
1. Profit-maximizing monopolist has
p > MC
2. Profit-maximizing (equilibrium)
level of output: MR = MC
Does not have a price curve
because it chooses its price
Profits can be +, -, or zero
depending on relationship between
price and ATC
Monopolist produces lower level of output with a higher price
exceeding MC.
Perfectly competitive industry
produces level of output such that
p = MC
Monopolist produces level of
output with p > MC
Monopolist restricts output below
competitive level
-thus reduces amount of economic
surplus
-creates inefficient market outcome
-creates deadweight loss
Entry Barriers
Natural -
-economies of scale: when the industry demand
conditions allow no more than one firm to cover its
costs while producing at its ME
-setup cost: large capital investment is needed to even
enter the monopolist’s market
Created -
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