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ch 13 monopoly.docx

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Department
Economics
Course
ECON 102
Professor
Eva Lau
Semester
Fall

Description
13– monopoly Chapter 13: Monopoly Monopoly and How It Arises  monopoly: a market with a single firm that produces a good or service for which no close substitute exists and that is protected by a barrier that prevents other firms from selling that good or service HowMonopoly Arises  no close substitutes  if a good has a close substitute, the firm faces competition from producers of the substitutes  barriers to entry  a constraint that protects a firm from potential competitors  natural, ownership, legal  natural monopoly: a monopoly created by a natural barrier to entry  when one firm can supply the entire market at a lower cost than two or more firms, the market is a natural monopoly  ownerships barrier to entry: when one firm owns a significant portion of a key resource  legal monopoly: a market in which competition and entry are restricted by the granting of a public franchise, government license, patent or copyright  public franchise: an exclusive right granted to a firm to supply a good or service  government licence: controls entry into particular occupations, professions and industries  patent: an exclusive right granted to the inventory of a product or service  copyright: an exclusive right granted to the author or composer of a literary, musical, dramatic or artistic work Monopoly Price-Setting Strategies  single-price monopoly: a firm that must sell each unit of its output for the same price to all its customers  price discrimination: a firm that sells different units of a good or service for different prices  it looks as if the firm is doing the customer a favour  it is actually charging the highest possible rice for each unit sold and making the largest profit  ex – computer manufacturers who install software on new machines give students, teachers, governments, and business different prices A Single-Price Monopoly’s Output and PriceDecision Price and Marginal Revenue  the demand curve of the firm is the market demand because there is only one firm  total revenue = p × q  marginal revenue = change in total revenue  marginal revenue is less than price because when the price is lowered to sell one more unit 2 opposing force affect total revenue Marginal Revenue and Elasticity  a single-price monopoly’s marginal revenue is related to the elasticity of demand for its good  if demand is elastic, a fall in price brings an increase in total revenue and marginal revenue is positive  if demand is inelastic, a fall in price decreases total revenue and marginal revenue is negative  if demand is unit elastic, total revenue doesn’t change and marginal revenue is 0  in monopoly, demand is always elastic Price and Output Decision  a monopoly sets its price and output at levels that maximize economic profit page 1 of 4 13– monopoly  faces the same type of technology and cost constraints as a competitive firm so its costs behave just like those of a firm in perfect competition  economic profit = TR – TC  the maximum profit = (price – AVC)×Q  occurs at Q where MC = MR  a monopoly influences the price of what it sells  a monopoly produces the profit-maximizing quantity and sells that quantity for the highest price it can get Single-Price Monopoly and Competition Compared ComparingPrice and Output  perfect competition  equilibrium occurs where the supply curve and demand curve intersect  each firm take that price and maximizes its profit by producing the quantity at which MC = MR  monopoly  maximizes profit by producing the quantity at which MC = MR  the competitive industry’s supply curve is the monopoly’s MC curve since there is only one firm  compared to a perfect competitive industry, a single-price monopoly produces a smaller output and charges a higher price Efficiency Comparison  perfect competition is efficient (when there are no external costs and benefits)  consumer surplus is the area of the triangle formed by the y-axis, the price-line and the demand curve  producer surplus is the area formed by the price line, the y-axis and the supply curve  in long-run competition equilibrium, entry and exit ensure that each firm produces its output at the minimum possible long-run average cost  summary: marginal social benefits(demand) = marginal social cost(supply) at the competitive equilibrium  deadweight lost is the area bounded by the demand curve, the supply curve and the quantity-line  consumer surplus shrinks because consumers lose by having to pay more for the good and by getting loess of the good  a monopoly produces a smaller output than perfect competition and faces no competition so it does not produce at the minimum possible long-run average cost  monopoly damages the consumer interest  produces less  increases the cost of production  raises the price by more than the increase in cost Redistribution of Surpluses  monopoly is inefficient because marginal social benefit exceeds marginal social cost and there is deadweight loss  the monopoly takes the difference between the high price and the competitive price on the quantity sold, taking part of the consumer surplus  this portion of the loss is not loss to society, but redistributed to the producer Rent Seeking  economic rent: any surplus (consumer, producer, or economic profit)  rent seeking: looking for wealth by capturing economic rent  buy a monopoly  searches for a monopoly that is for sale at a lower price than the monopoly’s economic profit  a person who wants to operate a taxi must buy a licence from someone who already has one, etc  create a monopoly  mainly a political activity page 2 of 4 13– monopoly  take the form o
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