ECN 104 Chapter Notes - Chapter 15: Deadweight Loss, Price Discrimination, Competitive Equilibrium

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14 Nov 2011
ECN104 – Chapter 15 Notes
Chapter 15
oWhy do monopolies arise?
oWhy is MR < P for a monopolist?
oHow do monopolies choose their P and Q?
oHow do monopolies affect society’s well-being?
oWhat can the government do about monopolies?
oWhat is price discrimination
oA monopoly is a firm that is the sole seller of a product without close
oIn this chapter, we study monopoly and contrast it with perfect
oThe key difference:
A monopoly firm has market power, the ability to influence the
market price of the produce it sells
A competitive firm has no market power
Why Monopolies Arise
oThe main cause of monopolies is barriers to entry – other firms
cannot enter the market
oThree sources of barriers to entry:
1. A single firm owns a key resource (e.g., DeBeers owns most of
the world’s diamond mines)
2. The government gives a single firm the exclusive right to
produce the good. (e.g., patents, copyright laws)
3. Natural monopoly: a single firm can produce the entire
market Q at lower cost than could several firms
Example: 1000 homes need electricity
ATC is lower if one firm services all 1000 homes than if
two firms each service 500 homes
Monopoly vs. Competition: Demand Curves
oIn a competitive market, the market demand curve slopes downward
oBut the demand curve for any individual firm’s produce is horizontal at
the market price
oThe firm can increase Q without lowering P
oSo, MR = P for the competitive firm
oA monopolist is the only seller, so it faces the market demand curve
oTo sell a larger Q, the firm must reduce P
oThus, MR doesn’t equal P
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