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Chapter 10

ECON-UA 2 Chapter Notes - Chapter 10: Fokker E.Ii, Longrun, Monopoly Price

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Marc Lieberman

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Chapter 10: Monopoly (up to pg 311)
1. What is a Monopoly?
a. A market in which only one firm sells a product w/no close substitutes; or
b. A single firm that sells in the market
2. How Monopolies Arise
a. Economies of Scale
i. A barrier to entry
ii. Causes LRATC to slope downward; the more output, the lower the cost
per unit
iii. If economies of scale persist through a large-enough range of output,
then a single firm can produce for the entire market at lower cost than
could two or more firms
iv. Natural monopoly: monopoly that arise bc of economies of scale
1. Ex. local monopolies
b. Legal Barriers
i. Protection of Intellectual Property
1. Gov’t allows for a monopoly over intellectual property only for a
limited amount of time
2. Patent: gov’t protection of new scientific discoveries & products
that result from them
3. Copyright: grants exclusive rights over literary, musical & artistic
ii. Gov’t Franchise: grant of exclusive rights over a product
1. Often granted when they think the market is a natural monopoly
2. Ex. Postal service & local industries (electricity, gas, water, &
garbage collection)
c. Network Externalities: added benefits for all users of a good or service that arise
bc other people are using it too
i. Joining a large network is more beneficial than joining a small network
ii. Ex. Facebook
3. Monopoly Behavior: faces constraints: on cost & on the price it can charge
a. Single Price vs. Price Discrimination
i. Single price monopoly: must charge the same price for every unit they
b. Monopoly Price or Output Decision
i. Monopolies make one decision about price & quantity
1. Once output is determined, so is price & vice versa
2. Price & output are not independent decisions, but different ways of
expressing the same decision
ii. Output & Revenue
1. When facing a downward-sloping demand curve, MR is
less than the price of output → MR < Demand curve
a. Bc a firm must lower the price in order to sell greater
iii. The Profit-Max Output Level
1. To max profit, a monopoly should produce the quantity where MC
= MR & MC curve crosses the MR curve from below
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