lecture16 - LECTURE 16 Econ 1 Winter 2008 RATIKA NARAG Ph.D...

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1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D. LECTURE 16 Imperfect competition means that some firms have some market power Market Power: A firm’s ability to change prices without losing or gaining all demand The extreme is pure monopoly – One seller for a product with no close substitutes – Seller has a lot of control over price – There are barriers to entry that protect the seller from competition LECTURE 16 Barriers to Entry: Economies of Scale – Hard for new firms to compete with larger, established firm – Natural monopoly – economies of scale are so big that there is room for only one firm (Public utilities) Ownership of Raw Materials/Patents (DeBeers) Public Franchises – Governments grant exclusive rights to sell (Highway rest-stops) Licensing – Entry into the industry regulated by govt./professional organization (American Medical Association; patents) LECTURE 16 Firms with market power must decide: – how much to produce – how to produce it – how much to demand in each input market what price to charge for their output LECTURE 16 The Monopoly Model – Sellers are price makers – Buyers are price takers – Barriers to entry (Entry into the industry is completely blocked) LECTURE 16 Market Structure under Monopoly Many buyers – One Seller – No close substitutes for the firm’s product – Well informed buyers – Barriers to entry
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2 LECTURE 16 Price and Output Decisions in Pure Monopoly Markets – In a monopoly market, there is no distinction between the firm and the industry because the firm is the industry – The market demand curve is the demand curve facing the firm, and total quantity supplied in the market is what the firm decides to produce LECTURE 16 Demand Curve facing a Monopolist – Market Demand = Firm Demand – Law of Demand: Market Demand is downward sloping
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