Microeconomics Final Review
Chapter 9: Monopoly
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Monopoly: firm that produces the entire market supply of a particular good or
service
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Market power: have ability to alter price of their output without losing all their
customers=> downward sloping demand curve=> to sell more quantity, must
lower prices
o
No industry demand curve and firm demand curve—just one
o
Affects all dimensions of economic welfare—level and composition of
output, employment and resource allocation, level and distribution of
income,
level and structure of prices
o
Monopolies have political power
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Profit maximization: MC=MR
o
MR does not equal P. MR always less than P
o
MR always less than D, except for first point
o
Can foresee impact of increased production on market prices but can also
prevent such production increases by its separate plants
o
Can alter output supplied, pick any point on the D curve thus changing the
market equilibrium
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Economies of scale: most would consolidate the factories to achieve this
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Monopolies receive larger profits when they reduce the quantity supplied b/c this
creates a shortage and prices increase
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Tendency to inhibit productivity advances and economic growth
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Price Discrimination: sale of an identical good at different prices to different
consumers by a single seller.
Sell each unit separately and charge various prices
to different people
o
“Adjust” price to the income and taste of each individual consumer
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Characteristics
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Barriers: high to entry industry
o
Patents: gov’t awarded, lasts 20 years of exclusive right to produce good
o
Franchises: giving single firm exclusive right to supply a particular good,
even though others can produce it
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Control of key inputs: securing exclusive access to key inputs
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Lawsuits: monopolies rich and can sue the poor start-up firms
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Acquisition: monopoly buy out potential competitor
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Economies of scale: if large firms have a substantial cost advantage over
smaller firms, smaller firms can’t compete
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Pros
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Greater ability to research and develop
o
Creates tremendous incentive for invention and innovation
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Large firms produce more efficiently than smaller ones
o
Monopolies have to worry about potential competition and will behave
accordingly
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o
Could attain greater cost savings
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Cons
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No incentive to R&D
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Greater profit prizes will stimulate more entrepreneurial activity
o
An innovator can make substantial profits in a competitive market before
the competition catches up
o
Barrier to entry don’t allow entrepreneurs to pursue product innovation or
technological improvements
o
Efficiency and size of plant don’t go hand in hand
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Natural monopoly: industry where one firm can achieve economies of scale over
the entire range of market supply
o
Economies of scale= barrier to entry
o
Examples: telephone companies, utility services, multiplex movie theaters
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Contestable markets: imperfect competitive industry subject to potential entry if
prices or profits increase
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- Fall '05
- Al-Sabea
- Economics, Microeconomics, Monopoly, Supply And Demand, Market Power
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