Economics 1021A/B Chapter Notes - Chapter 13: Economic Rent, Marginal Revenue, Legal Monopoly

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Published on 21 Nov 2011
School
Western University
Department
Economics
Course
Economics 1021A/B
Economics Chapter 13 Notes Nov.
20
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
Arises for two key reasons:
No close substitute
Barrier to entry
No close substitute
Monopoly sells a good or service that has no good substitute
Barrier to entry
Barrier to Entry
Barrier to entry: a constraint that protects a firm from potential
competitors
Three types:
Natural
natural barrier to entry creates a natural monopoly
natural monopoly: an industry in which economies of scale
enable one firm to supply the entire market at the lowest
possible cost
e.g. firms that deliver gas, water, electricity
Ownership
Occurs if one firm owns a significant portion of a key resource
Legal
Creates a legal monopoly
Legal monopoly: a market in which competition and entry
are restricted by granting of a public franchise, government
licence, patent, or copyright
Public franchise: an exclusive right granted to a firm to supply
a good or service
E.g. Canada Post
Government licence: controls entry into particular occupations,
professions, and industries
E.g. medicine, law, dentistry
Patent: exclusive right granted to the inventor of a product or
service
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Copyright: an exclusive right granted to the author or
composer of a literary, musical, dramatic, or artistic work
Natural Monopoly
Monopoly Price-Setting Strategies
Monopoly sets its own price
To sell a larger quantity, the monopoly must set a lower price
Two monopoly situations that create two price strategies:
Single price
Single-price monopoly: a firm that must sell each unit of its
output for the same price to all its customers
Price discrimination
Price discrimination: when a firm sells different units of a
good or service for different prices
When a firm discriminates, it looks as though it is doing its
customers a favour
It is charging the highest possible price for each unit sold and
making the largest possible profit
A Single-Price Monopoly’s Output and Price Decision
Price and Marginal Revenue
In a monopoly there’s only one firm, so the demand curve facing the firm is
the market demand curve
Total revenue (TR) is the price (P) multiplied by the quantity sold (Q)
Marginal revenue (MR) is the change in total revenue (TR) resulting from a
one-unit increase in the quantity sold
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Marginal Revenue and Elasticity
A single-rpice monopoly’s marginal revenue is related to the elasticity of
demand for its good
Demand is elastic if a 1% fall in price brings a greater 1% increase in the
quantity demanded
If demand is elastic, a fall in price brings a increase in total revenue
The marginal revenue is positive because the revenue gain from
the increase in quantity sold outweighs the revenue loss from
the lower price
Demand is inelastic if a 1% fall in the price brings a less than a 1% increase
in the quantity demanded
If demand is inelastic, a fall in price brings an increase in total revenue
The marginal revenue is negative because the revenue gain
from the increase in quantity sold is outweighed by the revenue
loss from the lower price
Demand is unit elastic if a 1% fall in price brings a 1% increase in the
quantity demanded
If demand is unit elastic, total revenue doesn’t change
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Document Summary

Monopoly sells a good or service that has no good substitute. Barrier to entry: a constraint that protects a firm from potential. Natural barrier to entry creates a natural monopoly. Natural monopoly: an industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost. E. g. firms that deliver gas, water, electricity. Occurs if one firm owns a significant portion of a key resource. Legal monopoly: a market in which competition and entry are restricted by granting of a public franchise, government licence, 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: exclusive right granted to the inventor of a product or service. Copyright: an exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work. To sell a larger quantity, the monopoly must set a lower price.

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