lec1_monopoly - Econ 101 Lecture Notes Monopoly 1 Edward Kung 1 What is a monopoly A monopoly is a firm that acts as the sole supplier to a market As we

lec1_monopoly - Econ 101 Lecture Notes Monopoly 1 Edward...

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Econ 101 Lecture Notes Monopoly 1 ú Edward Kung December 29, 2014 1 What is a monopoly? A monopoly is a firm that acts as the sole supplier to a market. As we will see, the main advantage that a monopoly has is that it can totally control either the price or the quantity of product in the market (but not both). In other words, they can choose to produce at any point along the demand curve. Sole supplier . The key to being a monopolist is that you are the only producer of a certain good in a certain market. Unlike a competitive firm, a monopolist’s decisions has influence over both the market price and market quantity of the good. Choose to produce at any point on the demand curve. It is important to remember that the monopolist is still constrained by the market demand curve. It cannot choose to produce outside the demand curve. A monopolistic producer of bananas cannot charge $100 per banana and still sell a million bananas, because one thing a monopolist cannot do is coerce individuals to buy their product at any price. Therefore, we think of a monopolist as either choosing the price of the good and having quantity determined by the market , or choosing the quantity of the good and having price determined by the market. They cannot choose both. 2 Why learn about monopolies? First, there are many examples of monopolies in real life. Utilities companies and cable companies are often monopolists. Airlines that operate the only flight between two cities, or ú Textbook chapter: Nicholson & Snyder Ch. 14 1
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hospitals that are the only hospital in a geographic area can also sometimes be thought of as monopolies. Understanding how monopolists behave is important for the regulation and management of these companies. Second, monopolistic behavior has consequences for economic e ffi ciency as measured by whether any gains from trade are left on the table (this will be clear later in the lectures). The welfare consequences for monopolistic behavior has been used to justify government regula- tion of monopolies, so an understanding of monopolistic behavior can guide the appropriate types of regulation used. Finally, although the section on imperfect competition will probably be more relevant for this, all firms are to some degree monopolists because most firms’ products are unique to some degree. Understanding the strategies employed by monopolists can help understand the strategies that non-monopolists employ as well.
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