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Chapter 13

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Western University
Economics 1021A/B
Jeannie Gillmore

Chapter 13 NotesMonopoly and How It Arisesa monopoly is 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 servicebarriers to entry o natural barrier to entry creates a natural monopoly a market in which economies of scale enable one firm to supply the entire market at the lowest possible costex public utilitiesthe long run average cost curve intersects the demand curve at the quantity demanded o ownership barrier to entry occurs if one firm owns a significant portion of a key resourceex De Beers controlled up to 90 of the worlds supply of diamonds o legal barriers to entry create a legal monopoly a market which competition and entry are restricted by the granting of a public franchise government license patent or copyrighta public franchise is an exclusive right granted to a firm to supply a good or service ex Canada Posta government license controls entry into particular occupations professions and industries ex entry into medicine law school teaching dentistrydoes not always create a monopoly but it restricts competitiona patent is an exclusive right granted to the inventor of a producta copyright is an exclusive right granted to the author or composer of a literary musical dramatic or artistic workMonopoly PriceSetting Strategiesa monopoly sets its own pricetwo pricing strategies o a singleprice monopoly is a firm that must sell each unit of its output for the same price to all its customersex De Beers sells diamonds of a given size and quality for the same price to all its customersif it tried to sell at a low price to some customers and at a higher price to others only the low price customers would buy as the higher price customers would in turn buy from the lower price customers o firms that practice price discrimination sell different units of goods or services for different pricesex Microsoft sells its Windows and Office software at different price to different buyersex pizza producers offer a second pizza for a lower price than the first one
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