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Chapter 15

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Boston University
CAS EC 101

Chapter 15: monopoly - Why monopolies arise  Monopoly: a firm that is the sole seller of a product without close substitutes  Fundamental cause is barriers to entry: a monopoly remains only seller in market b/c other firms cannot enter the market and compete • 3 main sources: o Monopoly resources: a key resource required for production is owned by a single firm o Government regulation: the government give a single firm the exclusive right to produce some good or service o Production process: a single firm can produce output at lower cost than can a large number of producers o Monopoly resources  Simplest way for a monopoly to rise is for single firm to own key resources o Government created monopolies  Patent and copyright laws o Natural monopoly: arises b/c a single firm can supply good or service at a lower cost than 2 or more firms - How monopolies make production and pricing decisions  Key difference b/c competitive firm and monopoly is the ability to influence the price of output  Demand curve of monopoly is more inelastic, curve slopes downward o A monopoly’s revenue  A monopolist’s marginal revenue is always less than price  When monopoly increases amount sold, revenue: • The output effect: more output sold, q is higher, increase total revenue • The price effect: the price falls, p is lower, decrease total revenue o Profit maximization  The monopoly’s profit maximizing of output is determined by the intersection of the marginal revenue curve and marginal cost curve  Competitive firm: p=mr=mc
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