Quiz10Notes - 4:33:00 PM WHY MONOPOLIES ARISE Monopoly a...

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19/11/2007 16:33:00 WHY MONOPOLIES ARISE Monopoly:  a firm that is the sole seller of a product without close substitutes  Natural monopoly:  a monopoly that arises because s ingle firm can supply a  good or service to an entire market at a smaller cost than could two or more firms  The fundamental cause of a monopoly is  barriers to entry  which include  o a key resource in owned by a single firm  o the government gives a single firm the exclusive right to produce some  good or service o the costs of production make a single producer more efficient than a  large number of producers  MONOPOLY RESOURCES When dealing with necessities, the monopolist can charge high prices even if  marginal cost is low Monopolies rarely arise for this reason because economies are large and thus  resources are owned by many people.  Ex: DeBeers controls 80% of the worlds production of diamonds. Advertises  in order to differentiate diamonds from other gems, to situate itself as a  monopoly rather than one firm among many in a monopolistically competitive  market, giving it greater market power. GOVERNMENT CREATED MONOPOLIES May be the result of political clout of the monopolist Patents and copyrights create monopolies which serve the public interest.  Pharmecuatical companies are given a 20 year patent on a drug to  encourage drug research while authors and can copyright their work for 100  years which encourages the creation of artistic works. Both patents and  copyrights work to increase social welfare.  NATURAL MONOPOLIES ATC curve continually declines Normally it is difficult for a firm to maintain a monopolistic position because  the attractiveness of profit encourages more firms to enter the market.  When dealing with natural monopolies, more firms do not enter because they  know that it is not possible to achieve the same low costs at the monopolist  enjoys because after entry, each firm produces less, and ATC rises.
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HOW MONOPOLISTS MAKE PRODUCTION AND PRICING DECISIONS MONOPOLY VS COMPETITION Because a monopoly is the sole producer in its market, it can alter the price of  its good by adjusting the quantity it supplies to the market Faces a downward sloping demand curve because the firm is a price maker.  The more it supplied the lower the price and the higher demand for the good.  In perfectly competitive markets, the demand curve was horizontal because  the producer was a price taker, and could supply at any level it wanted  without affecting price and demand.
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