Chapter 11 Outline - Chapter 11: Monopolies Monopoly: the...

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Chapter 11: Monopolies Monopoly: the only supplier of a good for which there is no close substitute A monopoly can set its price-it is not a price taker like a competitive firm A monopoly’s output is the market output, and the demand curve a monopoly faces is the market demand curve Main Topics: 1) Monopoly profit maximization: Like all firms, a monopoly maximizes its profit by setting its price or output so that its marginal revenue equals its marginal cost 2) Effects of a shift of the demand curve: A shift of the demand curve may have a wider range of effects on a monopoly than on a competitive market 3) Market power: How much the monopoly’s price is above its marginal cost depends on the shape of the demand curve it faces 4) Welfare effects of monopoly: By setting its price above marginal cost, a monopoly creates a deadweight loss 5) Cost advantages that create monopolies: A firm can use a cost advantage over other firms to become a monopoly 6) Government actions that create monopolies: Governments create monopolies by establishing government monopoly firms, limiting entry of other firms to create a private monopoly, and issuing patents, which are temporary monopoly rights 7) Government actions that reduce market power: The welfare loss of a monopoly can be reduced or eliminated if the government regulates the price the monopoly charges or allows other firms to enter the market 8) Monopoly decisions over time: If its current sales affect a monopoly’s future demand curve, a monopoly that maximizes its long-run profit may choose not to maximize its short-run profit 11.1 Monopoly Profit Maximization The monopoly’s marginal revenue curve lies below the demand curve at every positive quantity The marginal revenue is a straight line that starts at the same point on the vertical axis as the demand curve but has twice the slope of the demand
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This note was uploaded on 05/03/2009 for the course PAM 200 taught by Professor Unur during the Spring '08 term at Cornell University (Engineering School).

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Chapter 11 Outline - Chapter 11: Monopolies Monopoly: the...

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