Textbook Notes (368,098)
Canada (161,641)
Economics (923)
ECN 104 (388)
Chapter 15

Chapter 15 Notes

4 Pages
Unlock Document

ECN 104
Tsogbadral Galaabaatar

ECN104 – Chapter 15 Notes Chapter 15 • Questions o Why do monopolies arise? o Why is MR < P for a monopolist? o How do monopolies choose their P and Q? o How do monopolies affect society’s well-being? o What can the government do about monopolies? o What is price discrimination • Introduction o A monopoly is a firm that is the sole seller of a product without close substitutes o In this chapter, we study monopoly and contrast it with perfect competition o The 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 o The main cause of monopolies is barriers to entry – other firms cannot enter the market o Three 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 o In a competitive market, the market demand curve slopes downward o But the demand curve for any individual firm’s produce is horizontal at the market price o The firm can increase Q without lowering P o So, MR = P for the competitive firm o A monopolist is the only seller, so it faces the market demand curve o To sell a larger Q, the firm must reduce P o Thus, MR doesn’t equal P • Understanding the Monopolist’s MR o Increasing Q has two effects on revenue:  Output effect: higher output raises revenue  Price effect: lower price reduces revenue o To sell a larger Q, the monopolist must reduce the price on all the units it sells o Hence, MR < P o MR could even be negative if the price effect exceeds the output effect (e.g., when Common Grounds increases Q from 5 to 6) • Profit-Maximization o Like a competitive firm, a monopolist maximizes profit by producing the quantity where MR = MC o Once the monopolist identifies this quantity, it sets the highest price consumers are willing to pay for that quantity o It finds this price from the D curve. o 1. The profit-maximizing Q is where MR = MC o 2. Find P from the demand curve at this Q • The Monopolist’s Profit o As with a competitive firm, the monopolist’s profit equals (P – ATC) x Q • A Monopoly Does Not Have A Supply Curve o A competitive firm  Takes P as given  Has a supply curve that shows how its Q depends on P o A monopoly firm  Is a “price-maker,” not a “price-taker”  Q does not depend on P, rather Q and P are jointly determined by MC, MR, and the demand curve  So there is no supply curve for monopoly • CASE STUDY: Monopoly vs. Generic Drugs o Patents on new drugs give a temporary monopoly to the seller o When the patent expires, the market becomes competitive, generics appear • The Welfare Cost of Monopoly o Recall: In a competitive market equilibrium, P = MC and total surplus is maximized o In the monopoly equilibrium, P > MR = MC  The value to buyers of an additional unit (P) exceeds the cost of the resources needed to produce that unit (MC)  The monopoly Q is too low – could increase total surplus with a larger Q  Thus, monopoly results in a deadweight loss o Competitive equilibrium quantity = Qc, P = MC, total surplus is maximized o Monopoly equilibrium quantity = Qm, P > MC, deadweight loss • Price Discrimination o Discrimination: treating people differently based on some characteristic (e.g., age or gender) o Price Discrimination: selling the same good at different prices to different buyers o The characteristic used in price discrimination is willingness
More Less

Related notes for ECN 104

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.