Microeconomics_Final_Review - Microeconomics Final Review...

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Microeconomics Final Review Chapter 9: Monopoly Monopoly: firm that produces the entire market supply of a particular good or service 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 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 Economies of scale: most would consolidate the factories to achieve this Monopolies receive larger profits when they reduce the quantity supplied b/c this creates a shortage and prices increase Tendency to inhibit productivity advances and economic growth 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 Characteristics 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 o Control of key inputs: securing exclusive access to key inputs o Lawsuits: monopolies rich and can sue the poor start-up firms o Acquisition: monopoly buy out potential competitor o Economies of scale: if large firms have a substantial cost advantage over smaller firms, smaller firms can’t compete Pros o Greater ability to research and develop o Creates tremendous incentive for invention and innovation o 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 Cons o No incentive to R&D o 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 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 Contestable markets: imperfect competitive industry subject to potential entry if prices or profits increase
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