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Chapter 15

ECO101H1 Chapter Notes - Chapter 15: Natural Monopoly, Substitute Good, Marginal Revenue


Department
Economics
Course Code
ECO101H1
Professor
James Pesando
Chapter
15

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CHAPTER 15 MONOPOLY
Monopoly – a firm that is the sole seller of a product without close substitutes
Natural monopoly – a monopoly that arises because a single firm can supply a good or service to
an entire market at a smaller cost that could 2 or more firms
Price discrimination – the business practice of selling the same good at different prices to
different customers
WHY MONOPOLIES ARISE
The fundamental cause of monopoly is barriers to entry
Barriers to entry have 3 main sources:
o1. Monopoly resources: a key resource is owned by a single firm
o2. Government created monopolies: the government gives a single firm the
exclusive right to produce some good or service
o3. Natural monopolies: a single firm can produce output at a lower cost than can a
large number of producers
Monopoly resources:
oThe price of a good is equal to the marginal cost of producing an extra unit
Government created monopolies:
oThe parent and copyright laws are 2 important examples of how the government
creates a monopoly to serve the public interest
oThe benefit of the patent and copyright laws is the increased incentive for creative
activity
oThe benefit is offset, to some extent, by the costs of monopoly pricing
Natural monopolies:
oArises when there are economies of scale over the relevant range of output
HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS
Because a monopoly is a sole producer in its market, it can alter the price of its good by
adjusting the quantity it supplies to the market
Competitive markets sell a product with perfect substitutes, so perfectly elastic
For a monopoly, the demand curve is the market demand curve  slopes downwards
Total revenue = quantity sold x price
A monopolist’s marginal revenue is always less than the price of its good
When a monopoly increases the amount it sells, it has 2 effects on TR:
o1. The output effect: more output sold, so Q is higher, which tends to increase TR
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