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Chapter 9

HON 1302 Chapter Notes - Chapter 9: Price Discrimination, Efficient-Market Hypothesis, Economic Equilibrium


Department
HON - HONORS
Course Code
HON 1302
Professor
Tomic
Chapter
9

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Economics Textbook Chapter 9 Monopoly
The Monopoly Market Structure
Complete opposite of perfect competition
Corresponds only approximately to real-world industries
Characteristics of a Monopoly
Single Seller
This single firm is the industry
One firm provides total supply in a market
Local monopolies are more realistic than national or world market monopolies
o Example of local monopoly:
Campus bookstore (the only bookstore on campus)
Concession stand at a sports game (the only place to buy food or drink at the
event)
Small town gas station or drugstore (only place to buy gas or convenience store
goods in the town)
o Example of national monopoly:
U.S. postal service (only mode of first-class mail)
Unique Product
No close substitutes for good
Reason for little to no competition
Realistically, few (if any) products lack substitutes
o Example in regards to campus bookstore monopoly in previous characteristic
Students can buy textbooks online they dot have to buy textbook from the
campus bookstore, even if it is the only place to buy books on campus
Impossible Entry
Ownership of a Vital Resource
o Sole control of the entire supply of necessary or strategic input for a product
o Real-life example: NBA or NFL
They have contracts with all the best players, so it would be hard to have
another professional organization for the sport
Legal Barriers
o Government granted licenses restrict entry into some industries and occupations
o Patents prohibit other firms from selling a product for 20 years
Economies of Scale
o Large-scale production reduces costs of production
o Means monopolies can emerge naturally
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Natural Monopoly = an industry in which the long-run average cost of production declines
throughout the entire market. As a result, a single firm can supply the entire market demand at
a lower cost than two or more smaller firms.
o Common in utility sectors: natural gas, water, cable, etc.
o In the case of monopolies, the government regulates the monopolies to prevent
exploitations and protect consumers
o As you can see in the above graph the cost of production for 5 firms would be a total of
$3000, the total cost of production for 2 firms would be $2000, and the total cost of
production for one firm would be only $1300.
Network Good
Network good = a good that increases in value to each user as the total number of users
increases. As a result, a firm can achieve economies of scale.
o Examples include Facebook and Match.com
Can result in a firm increasing sales rapidly and thus achieving economies of scale
Smaller firms then have higher-cost products and cannot compete, most likely going out of
business eventually
CONCLUSION: The greater the # of people connected to a network god, the more benefits of the
product to each person
Price and Output Decisions for a Monopolist
Biggest difference between monopolies and perfect competition lies in the shape of the demand
curves, not the cost curves
Monopolist are price makers
o Price maker = a firm that faces a downward-sloping demand curve and therefore it can
choose among price and output combinations along the demand curve
Marginal Revenue, Total Revenue, and Price Elasticity of Demand
35
30
25
20
15
10
5
0
20 40 60 80 100 120
5 firms
2 firms
1 firm
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