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ECO100 - Monopoly

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University of Toronto St. George
James Pesando

ECO100: LECTURE #14 11/09/11 EXAMPLE: HOT DOG CONTINUED The market for hot dog stands is perfectly competitive. The market price is $3.00. Questions: 1) In the long run, will the price remain at $3.00? Will it rise? Will it fall?  Price will remain at $ 3.00 if the representative hot dog stand is earning economic profit. (ie. if P = ATC)  If the representative stand is earning economic profits (P > ATC), then more firms will enter the industry, the market supply curve will shift right, and the price will fall beneath $3.00.  If the representative stand is suffering from an economic loss (P < ATC), firms will exit the industry, the market supply curve will shift left, and the price will rise above $3.00. 2) If the city of Toronto increases the annual licensing fee from $500 to $1000, what will happen to the number of hot dog stand? (Assume, for simplicity, that the representative hot dog stand is earning zero economic profit) Short Run MC ATC’ AT $3.00 C dd Firm q Increase in fixed cost  MC does not chance, so representative firm produces unchanged level of output. However, ATC shifts up to ATC’ and firm is now suffering an economic loss. Result: Price is unchanged Long Run Since representative firm is suffering an economic loss, firms exit the industry, the market supply curve shifts left, and price increases. SS’ SS P’ $3.00 DD Firms will continue to exit industry until the price increases to the point where P =ATC’ MC ATC’ P’ ATC $3.00 q q’ In the long run, there are fewer firms, but firms that remain produce larger output (q’ > q) MONOPOLY Single seller (of products with no close substitutes) Barriers to Entry 1) Legal barriers (legal monopoly) - post office (first class mail) - patents 2) Natural barriers (natural monopoly) - high fixed costs + low marginal costs - ATC may continually decline (ie. pipeline) - implication: efficient to have only one firm - public policy: regulate the single firm Ex. the toll road (Highway 407) north of Toronto is a monopoly (If you want to avoid traffic congestion on the public highway, the 401, Highway 407 is the only alternative) Can the owners of Highway 407: 1) Set the highest possible price? 2) Earn unlimited profits? For a monopolist: 1) Market DD = Firm DD (the individual firm represents the market) 2) Market DD
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