Textbook Notes (369,072)
Canada (162,367)
Economics (326)
ECON 110 (199)
Chapter 10

Chapter 10 notes.docx

6 Pages

Course Code
ECON 110
Ian James Cromb

This preview shows pages 1 and half of page 2. Sign up to view the full 6 pages of the document.
Chapter 10: Monopoly, Cartels, and Price Discrimination A Single-Price Monopolist Revenue Concepts for a Monopolist  The same forces that lead to perfectly competitive firms to have U-shaped costs curves equally applies to a monopolist  Because a monopolist is the sole producer of the product that it sells, the demand curve it faces is simply the market demand curve for the product o Therefore, the firm faces a negatively sloped demand curve unlike those individual firms in a perfectly competitive market  Sales can only be increased if price is reduced - price can only go up if sales reduce Average Revenue  A monopolist charges one price for all units, total revenue equals price x the quantity sold  Since average revenue is total revenue divided by the quantity sold, therefore average revenue is just equal to the sale price of the product  Since the demand curve shows the price of the product, it follows that the demand curve is also the monopolist`s average revenue curve Marginal Revenue  Because its demand curve is negatively sloped, the monopolist must reduce the price it charges on every product it sells to sell one extra unit o Implies that the price received from the one extra unit sold it not the firm`s marginal revenue because, by reducing the price on all previous units, the firm loses some revenue  Marginal revenue is equal to the sale price minus this lost revenue o Marginal revenue will be less than the price at which it sells out put – therefore the MR curve is below its demand curve Short-Run Profit Maximization  Output should be based on equating its marginal cost with its marginal revenue o The interception between these curves determines the firm’s quantity produced, but here the priced charged is determined by the demand curve  A profit-maximizing monopolist may not be making profits o Even when the firm is choosing its quantity to maximize its profits, the size of those profits depends on the position of the ATC curve No Supply Curve for Monopolist  A monopolist does not have a supply curve because it is not a price taker – it chooses its profit maximizing price-quantity combination from among the possible combinations on the market demand curve – this level of output is where MC and MR intersect Firm and Industry  Only one producer, there is no need to discuss firm vs. industry – short run position of the firm is also the short-run equilibrium of the industry Competition and Monopoly Compared  For a perfectly competitive industry, the equilibrium is determined by the intersection of the industry demand and supply curves o Since the industry supply curve is determined by the sum of all of the individual firm’s marginal cost curves, the equilibrium output in a perfectly competitive industry is such that price = marginal cost  In contrast, for the monopolist equilibrium output is such that price is greater than marginal cost – they produce a lower level of output compared to perfectly competitive  Since price exceeds marginal cost, society would benefit if more units of output were produced – because marginal value exceeds the marginal cost o More economic surplus would be generated for society o The monopoly’s profit-maximizing decision to restrict output below the competitive level creates a loss of economic surplus for society – deadweight loss o This leads to market inefficiency Entry Barriers and Long-Run Equilibrium  As in perfectly competitive markets, profits and losses lead to market entry and exit  If the monopoly is suffering losses in the short-run, it will continue to operate as long as it can cover its variable costs o In the long-run, it will leave the industry unless it can find a scale of operations at which its full opportunity costs can be covered  If the monopoly is making profits, other firms will want to enter the industry o As such entry occurs, the firm will cease to be a monopoly and will have to compete with new firms and thus capture only part of the overall market demand  If monopoly profits are to persist in the long run, there must be barriers to entry Natural Entry Barriers  Most commonly arise as a result of economies of scale o When the long run average cost curve is negatively sloped over a large range of output, big firms have significantly lower average total costs than small firms  A natural monopoly occurs when the industry’s demand conditions allow no more than one firm to cover its costs while producing at its minimum efficient scale  One type of natural entry barriers is a setup cost – the cost to a new firm of entering the market, developing its brand image and its dealer network may be so large that entry would be unprofitable Created Entry Barriers  Many of these are created by government actions o Patent laws, for example, prevent entry by giving the patent holder the sole right to produce a particular product for a specific period of time o Regulation and/or licensing of firms can also restrict entry The Significance of Entry Barriers  Because of the freedom to enter an exit markets, perfectly competitive industries cannot have profits that persist in the long run  In monopolized industries, profits can persist in the long run whenever there are effective barriers to entry The Very Long Run and Creative Destruction  In the very long run, technology changes – new ways of producing old products, new products created to satisfy the same needs o Monopolists that try to prevent market entry will sooner or later find these barriers circumvented due to innovation o Patents can be circumvented by using slightly different production processes o May produce a slightly different product to satisfy the same needs o Inventing a tech that produces at a low minimum efficient scale which allows it to enter the industry and still cover its costs  Such innovations explain why monopolies rarely persist over a long period of time  Creative Destruction: The replacement of one product by another o The development of similar products against which the monopolist will not have entry protection o Reflects new firms’ abilities to circumvent a monopolists entry barriers Cartels as Monopolies  Cartel: An organization of producers who agree to act as a single seller in order to max
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.