Textbook Notes (368,588)
United States (206,084)
Economics (994)
Chapter 15

Chapter 15 Economics.docx

8 Pages
49 Views
Unlock Document

Department
Economics
Course
Economics 10a
Professor
Gregory Mankiw
Semester
Fall

Description
Chapter 15 Economics: Monopoly • Monopoly: a firm that is the sole seller of a product without close substitutes o Cause: high barriers to entryother firms cannot enter the market and compete with it  Monopoly resources: a key resource for production is owned by a single firm • If there is only one well in a town, then the owner of the well has significant market power • If the resource were a necessity like water, the monopolist could obtain a high price even if the marginal cost of water is low • Example: DeBeers’diamond mines • This is rare because the economy is so large and resources are owned by many people  Government regulation: the government gives a single firm the exclusive right to produce some good or service • Monopolies could be granted to friends and allies of a government • Sometimes governments grant monopolies because they are viewed to be in the public interest (i.e. patent and copyright laws) • Because copyright and patent laws give exclusive rights to one producer, it leads to higher prices than what would occur under competition • By allowing producers to charge higher prices and earn higher profits, the laws encourage desirable behavior like innovations (incentivizing creativity)  Natural monopoly: created by production process; a single firm can produce output at a lower cost than can a larger number of producers • Occurs when theATC curve continually declines • Arises when there are economies of scale over the relevant range of output • For any given amount of output, a larger number of firms leads to less output per firm and higher average total cost • Example: Water distributions o Multiple firms would each have to pay the fixed price of laying pipe, making the average total cost of water lower if a single firm ran the market • Club goods that are excludable but not rival in consumption: a bridge built and maintained by a firm is a natural monopoly o If more bridges were built because of congestion, then the natural monopoly would be abolished • The size of the market determines whether an industry is a natural monopoly in some casesas the market expands, a natural monopoly can evolve into a more competitive market • Firms typically have trouble maintaining a monopoly position without ownership of a key resource or protection from the government o Amonopolist’s profit attracts entrants into the market, which makes the market more competitive o Natural monopolies make entering a market unattractive because would-be entrants know that they cannot achieve the same low costs that the monopolist enjoys because, after entry, each firm would have a smaller piece of the market • Monopolies are price-makers: they charge prices that exceed the marginal cost o Amonopoly firm can control the price of the good it sells, but because a high price reduces the quantity that its customers buy, the monopoly’s profits are not unlimited o The outcome in such a market is not often in the best interest of society o It can alter the price of its good by adjusting the quantity it supplies to the market • Because a monopoly is the sole producer in the market, its demand curve is the market demand curve (sloping downward) (demand curve=average revenue) o Because the firm’s price equals its average revenue, the demand curve is theAR curve o If the monopolists reduces the quantity of output that it produces and sells, the price of its output increases o If the monopolist raises the price of the good, consumers buy less of it o The market demand curve prevents the monopolist from charging a high price and selling large quantity at that high price by placing a constraint on the market o The market demand curve describes the combinations of price and quantity that are available to a monopoly firm (which can only choose quantities and prices along the curve) o The demand curve relates the amount customers are willing to pay with quantity sold • Average revenue always equals the price of the good (AR=TR/Q) • Total Revenue=P × Q • Marginal revenue: the amount of revenue that a firm receives for each additional unit of output o MR=Change in TR/Change in Q o Always less than the price of its good (MRMR, the firm should increase profit (reduce losses) by producing less units until MC=MR • The monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal revenue curve (which is less than the price curve) and the marginal-cost curve • P>MR=MC; Pr
More Less

Related notes for Economics 10a

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit