Microeconomics_Final_Review - Microeconomics Final Review...

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

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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