Chapter 15: Monopoly

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Monopoly

Firm that is the sole seller of a product without close substitutes
(Price Maker)

Barriers to Entry

-monopoly resources
-Government regulation
-the production process

Reasons why monopolies arise

-monopoly resources
-Government regulation
-the production process

Government Regulation

gives a single firm exclusive right to produce good or service
-Patents + copyrights
-Higher prices
-higher profit

Monopoly Resources

key resources required for production owned by single firm
-higher prices

Production Process

-single firm can produce output at lower cost than larger can
-larger number of producers

Natural Monopoly

single firm can supply good or service to entire market

For natural monopoly club goods are....

excludable but not rival in competition

Firm has natural monopoly if....

ATC curve continually declines

Monopoly

-price maker
-sole producer
-downward sloping demand (Market demand curve)

Competitive Firm

-price taker
-one producer of many
-demand-horizontal line/price

Competitive Firms Demand Curve is....

horizontal

Monopolist's Demand Curve is....

Diagonally declining

Monopolies Revenue

TR=P x Q

Average Revenue

(Revenue per unit sold)
TR/Q

Marginal Revenue (MR<P)

-Revenue per each additional unit of output
-change in total revenue when output increases by 1 unit
-can be negative

Output Effect

-Q is higher
-increase total revenue

Price Effect

-P is lower
-Decrease total revenue

because MR<P the MR curve is.....

below the demand curve

demand curve shows how....

the quantity affects the price of the good

marginal revenue shows how....

the firm's revenue changes when quantity increases by 1 unit

Marginal revenue is always less than the price because.....

the price on all units sold must fall if the monopoly increase production

Profit Maximization: If MR>MC then.....

increase production

Profit Maximization: If MR< MC then....

produce less

Maximize profit at

MR=MC

In a monopoly price.....

exceeds marginal cost

Profit:

TR-TC = (P-ATC) xQ

benevolent planner

maximize total surplus

A benevolent social planner who wanted to maximize total surplus in a market would...

choose the level of output where the demand curve and marginal cost curve intersect.
-below this level the value of the good to the marginal buyer exceeds the marginal cost of making the good
-above this level the value to the marginal buyer is less than marginal cost

monopoly produces.....

less than the socially efficient quantity of output
-deadweight loss

The deadweight loss is....

triangle between the demand curve and MC curve

Price discrimination

-sell same good at different prices to different customers
-strategy to increase profit
-can raise economic welfare
-requires ability to separate customers according to their willingness to pay

Perfect Price Discrimination

-charge each customer a different price
-monopolist get the entire surplus
-no deadweight loss

Without Price Discrimination

-single price> MC
-consumer surplus
-producer surplus (Profit)
Deadweight loss

Examples of Price Discrimination

-movie tickets
-airline prices
-discount coupons
-financial aid
-quantity discounts

Because a natural monopoly has declining average total cost....

marginal cost is less than average total cost. Therefor if regulators require a natural monopoly to change a price equal to marginal cost, price will be below average total cost and monopoly will lose money

One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where.....

marginal cost equals marginal revenue, while a monopolist produces where price exceeds marginal cost.

If a profit- maximizing monopolist faces a downward sloping market demand curve, its....

marginal revenue is less than the price of the product

When a monopoly increases its input in sales...

the output effect works to increase total revenue, and the price effect works to decrease total revenue

Monopolies are not socially optimal because they....

restrict output below the socially efficient level of production

When we compare economic welfare in a monopoly market to a competitive market, the profits earned by the monopolist represent...

a transfer of benefits from the consumer to the producer
-profits are not the DWL they're just money that used to be part of the consumer surplus

Selling a good at a price determined by the intersection of the demand curve and the marginal cost curve is consistent with the....

-socially-optimal level of output
-market solution for a profit-maximizing monopoly

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