L7-Monopoly - Monopoly Chapter 15 1. TO BE A MONOPOLIST...

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Monopoly Chapter 15
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1. TO BE A MONOPOLIST z While a competitive firm is a price taker , a monopoly firm is a price maker . z A firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes.
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2. WHY MONOPOLIES ARISE z The fundamental cause of monopoly is barriers to entry . z Barriers to entry have three sources: 1. Ownership of a key resource. 2. The government gives a single firm the exclusive right to produce some good. 3. Costs of production make a single producer more efficient than a large number of producers.
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1) Monopoly Resources z Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.
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2) Government-Created Monopolies z Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. z Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.
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3) Natural Monopolies z An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. z A natural monopoly arises when there are economies of scale over the relevant range of output. The average total cost is down-sloping.
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3. Monopoly versus Competition z Monopoly Is the sole producer Faces a downward-sloping demand curve Is a price maker Reduces price to increase sales z Competitive Firm Is one of many producers Faces a horizontal demand curve Is a price taker Sells as much or as little at same price
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4. Profit Maximization z A monopolist’s marginal revenue is always
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This note was uploaded on 05/15/2008 for the course ECON 2106 taught by Professor Minjaesong during the Spring '06 term at Georgia Institute of Technology.

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L7-Monopoly - Monopoly Chapter 15 1. TO BE A MONOPOLIST...

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