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Chapter 13&14

Chapter 13 & 14 - Monopoly & Monopolistic Competition.docx

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ECON 1000
Ardeshir Noordeh

ECON 1000 November 26, 2013 CHAPTER 13: Monopoly • Monopoly: industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. o 2 key features:  No close substitutes  Barriers to entry o Types:  Legal (patent, licenses)  Natural (cost based) o Price-setting strategies  Single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers.  Price discrimination is the practice of selling different units of a good or service for different prices Single­Price  Monopoly’s Output & Price Decision • Price and Marginal Revenue o A monopoly is a price setter, not a price taker like a firm in perfect competition. o The reason is that the demand curve for the monopoly’s output is the market demand curve. o To sell a larger output, a monopoly must set a lower price. • Total revenue = price x quantity • Marginal revenue = change in TR from one-unit increase in quantity sold • For single-price monopoly, MR is less than price at each output level  MR Pc. • Compared to perfect competition, monopoly restricts output and charges a higher price. • Efficiency comparison o The demand curve is the MB curve and the competitive market supply curve is the MC curve. o So competitive equilibrium is efficient: MB = MC. ECON 1000
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