EC120 Chapter Notes - Chapter 15: Natural Monopoly, Demand Curve, Marginal Revenue
11/6/15
1
EC120 – CHAPTER 15: MONOPOLY
WHY MONOPOLIES ARISE
• MONOPOLY: A firm that is the sole seller of a product without close
substitutes
• Monopolies remain the only seller in the market because there are high
barriers to entry, which come from three main sources:
o MONOPOLY RESOURCES: A key resource is owned by a single firm
o GOVERNMENT-CREATE MONOPOLIES: The gov’t gives a single firm
the exclusive right to produce some good or service
o NATURAL MONOPOLIES: A single firm can produce output at a lower
cost than a large number of producers
MONOPOLY RESOURCES
• E.g. In a small town with one fresh-water well, whoever owns it can dictate
the price of water fro that town.
• Actual economies are large and resources are owned by many people
GOV’T-CREATED MONOPOLIES
• Gov’t can grant a monopoly because doing so is viewed to be in the best
interest for the public
• Patents and Copyright laws are examples of a gov’t granted monopoly
NATURAL MONOPOLIES
• NATURAL MONOPOLY: A monopoly that arises because a single firm can
supply a good or service to an entire market at a smaller cost than could two
or more firms
• When economies of scale are over the relevant range of output
• For any given amount of output, a larger number of firms lead to less output
per firm and higher average total cost.
• When a firm is a natural monopoly, they are less concerned about new
entrants eroding its monopoly power.
• Size of market can determine whether an industry is a natural monopol
MONOPOLY VS. COMPETITION
• Key difference is that monopoly’s can influence the price of it’s output
• Competitive firms have a horizontal demand curve; Monopolies demand
curve is the market demand curve (regular).
• Monopolies would like to sell lots of product at a high price, but because of
the market demand curve this is impossible
MONOPOLY’S REVENUE
• A monopolist’s marginal revenue is always less than the price of its good
o Caused by the downward sloping demand curve
• OUTPUT EFFECT: More output is sold, so Q is higher, which tends to increase
total revenue.
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In a small town with one fresh-water well, whoever owns it can dictate the price of water fro that town: actual economies are large and resources are owned by many people. Gov"t-created monopolies: gov"t can grant a monopoly because doing so is viewed to be in the best, patents and copyright laws are examples of a gov"t granted monopoly. 11/6/15: price effect: the price falls, so p is lower, which tends to decrease total revenue. In monopolized markets, price exceeds marginal cost: profit = (p atc) x q. A parable about pricing: price discrimination: the business practice of selling the same good at different prices to different customers. It can also raise economic welfare, by selling more product. sh. 50 for a single donut for a dozen: third-degree price discrimination: when the market can be segmented into categories with different elasticity"s of demand, e. g. Movie tickets being sold at a lower price for children and elderly.