Chapter 15 notes

# Chapter 15 notes - ECON 101 BALABAN MONOPoLIES Monopolies...

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ECON 101 – BALABAN MONOPoLIES Monopolies are price makers , not price takers. The marginal cost of a monopoly’s product is low. Monopolies, though they control their prices, do not have unlimited profits because the market will not buy the product if it is priced too high. Monopoly: a firm that is the sole seller of a product without close substitutes. o A key resource is owned by a single firm. The DeBeers Company practically controlled the diamond market. o The government gives a single firm the exclusive right to produce some good or service. The government can grant patents to a certain company; this effectively makes them a monopoly of their unique product. o The costs of production make a single producer more efficient than a large number of producers. The government can set up a regulated industry because it allows a better allocation of resources, an example of this is utility companies. Utility companies have a high start-up cost, because of the need of infrastructure, but then have a low marginal cost. This means it’s more efficient for one company to have a monopoly. This is called a natural monopoly. Natural Monopoly: a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. o Natural monopolies are characterized by a economies of scale over the relevant range of output. The profit maximizing point of a monopoly lies where the marginal-revenue curve intersects the marginal-cost curve. The price at this value is located at the quantity dictated by the intersection of the MR and MC curve, and the demand curve. For a competitive firm: P = MR = MC For a monopoly: P > MR = MC MARGINAL COST < AVERAGE TOTAL COST (MC < ATC) Monopolies: - Profit = TR – TC - Profit = (TR/Q – TC/Q) X Q, where TR/Q is the av erag e revenue, price is P, a nd TC/Q is the averag e total cost, ATC. -

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Chapter 15 notes - ECON 101 BALABAN MONOPoLIES Monopolies...

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