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Chapter 12

Economics 1021A Chapter 12


Department
Economics
Course Code
ECON 1021A/B
Professor
Terry Biggs
Chapter
12

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Economics 1021A Chapter 13 2013-11-25
A monopoly is a market:
That produces a good or service for which no close substitute exists
In which there is one supplier that is protected from competition by a barrier preventing the entry of new
firms.
A monopoly is a price setter, not a price taker like a firm in perfect competition.
The reason is that the demand for the monopoly’s output is the market demand.
To sell a larger output, a monopoly must set a lower price.
A monopoly has two key features:
No close substitutes
If a good has a close substitute, even if it is produced by only one firm, that firm effectively faces
competition from the producers of the substitute.
A monopoly sells a good that has no close substitutes.
Barriers to entry
A constraint that protects a firm from potential competitors are called a barrier to entry. Three types of
barriers to entry are:
Natural
A natural monopoly is a market in which economies of scale enable one firm to supply the entire
market at the lowest possible cost.
In a natural monopoly, economies of scale are so powerful that they are still being achieved even when the
entire market demand is met.
Ownership
An ownership barrier to entry occurs if one firm owns a significant portion of a key resource.
Legal
A legal monopoly is a market in which competition and entry are restricted by the granting of a:
Public franchise (like Canada Post, a public franchise to deliver first-class mail)
Government license (like a license to practice law or medicine)
Patent or copyright
There are two types of monopoly price-setting strategies:
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