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CHAPTER TWENTY-FOUR PURE MONOPOLY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. List the four characteristics of pure monopoly. 2. List three barriers to entry. 3. Describe the demand curve facing a pure monopoly and how it differs from that facing a firm in a perfectly competitive market. 4. Compute marginal revenue when given a monopoly demand schedule. 5. State the principle that determines the price and output level the monopoly will choose and determine this level when given demand and cost data or graphs. 6. Discuss the economic effects of pure monopoly on price, quantity of product produced, allocation of resources, distribution of income, and on technological progress. 7. List two conditions necessary for price discrimination. 8. Explain why price discrimination increases profits and output levels over nondiscriminatory monopoly levels. 9. Identify two pricing goals of monopoly regulation and explain the dilemma the regulators face in achieving their goals. 10. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Pure Monopoly: An Introduction A. Definition: Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. B. There are several characteristics that distinguish pure monopoly. 1. There is a single seller so the firm and industry are synonymous. 2. There are no close substitutes for the firm’s product. 3. The firm is a “price maker,” that is, the firm has considerable control over the price because it can control the quantity supplied. 4. Entry into the industry by other firms is blocked. 5. A monopolist may or may not engage in nonprice competition, depending on the nature of its product; advertising may be done to increase demand. C. Examples of monopoly 1. Public utilities—gas, electric, water, cable TV, and local telephone service companies— are monopolies. 2. DeBeers diamond syndicate controls 70 percent of world’s diamond supply (see Last Word).
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Pure Monopoly 2 3. Manufacturing monopolies are virtually nonexistent in nationwide U.S. manufacturing industries. 4. Professional sports leagues grant team monopolies to cities. 5. Monopolies may be geographic. A small town may have only one airline, railroad, bank, etc. D. Importance of monopoly and its study 1. A small, but significant fraction (5-6 percent) of economic output is carried out in industries approaching monopoly. 2. Analysis of monopolies yields insights concerning monopolistic competition and oligopoly, the more common types of market situations (see Chapters 25). II. Barriers to Entry Limiting Competition A. Economies of scale constitute one major barrier. This occurs where the lowest unit costs and, therefore, low unit prices for consumers depend on the existence of a small number of large firms or, in the case of monopoly, only one firm. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with
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