Topic 6 Monopoly-1 - Topic 6 Monopoly Monopoly and How It...

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Topic 6 Monopoly
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A monopoly is a market: That produces a good or service for which no close substitute exists In which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. A monopoly two key features are: No close substitutes Barriers to entry Monopoly and How It Arises
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No Close Substitute If a good has a close substitute, even if it is produced by only one firm, that firm effectively faces competition from the producers of the substitute. A monopoly sells a good that has no close substitutes. Barriers to Entry A constraint that protects a firm from potential competitors are called barriers to entry . Three types of barriers to entry are Natural Ownership Legal Monopoly and How It Arises
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Natural Barriers to Entry A natural monopoly is a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost. Monopoly and How It Arises Ownership Barriers to Entry An ownership barrier to entry occurs if one firm owns a significant portion of a key resource. Legal Barriers to Entry A legal monopoly is a market in which competition and entry are restricted by the granting of a license, or pattern right. Or franchise.
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Monopoly Price-Setting Strategies For a monopoly firm to determine the quantity it sells, it must choose the appropriate price. There are two types of monopoly price-setting strategies: A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers. Price discrimination is the practice of selling different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms. Monopoly and How It Arises
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A Single-Price Monopoly Output and Price Relation between Price and Marginal Revenue in Monopoly A monopoly is a price setter, not a price taker like a firm in perfect competition. The reason is that the demand for the monopoly’s output is the market demand. To sell a larger output, a monopoly must set a lower price.
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P (PRICE) Q (QUANTITY DEMANDED) TR (Total Revenue) MR (Marginal Revenue) ∆TR/∆Q A 20 0 0 18 B 18 1 18 14 C 16 2 32 10 D 14 3 42 6 E 12 4 48 2 F 10 5 50 A Single-Price Monopoly Output and Price
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Total revenue, TR , is the price, P , multiplied by the quantity sold, Q .
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