Chap_10 - Chapter 10 Monopoly and Other Forms of Imperfect...

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Chapter 10: Monopoly and Other Forms of Imperfect Competition Purpose: To define imperfect competition and explain the decision principles used by firms that operate in imperfectly competitive situations. Explanations center on decisions related to the quantities that firms will place on the market, the prices that they will charge, and the effects that these will have on economic surplus and economic efficiency. Unique relationships between price and quantity are discussed. The chapter provides detailed insights into price discrimination and public policies that relate to monopoly. Length : 30 pages Time required to read: Approximately two hours. Some sections of the chapter fit with knowledge that the students bring to the class. These parts of the chapter are easy to read and understand. Other sections (economies of scale, price discrimination, the break- down of the invisible hand) are quite difficult and will require several readings for adequate understanding. Number of lectures required to cover the topic: At least two 50-minute sessions are needed. One will deal with the explanations of monopoly power and the differences between perfect and imperfect competition. A second will cover profit maximization in a non-competitive firm. Parts of a third lecture may be needed for price discrimination and the government’s role in dealing with monopoly. Summary The chapter opens with an easy-to-understand description of a firm (industry) that can control the price that it charges for its products. This is a very important characteristic of a firm operating outside of competition. Three kinds of imperfect competition (monopoly, oligopoly, and monopolistic competition) are defined as is the authors’ decision to treat them together as “monopoly.” The differences between perfect
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competition and imperfect competition are stressed. Control over price, the distinguishing characteristic of imperfect competition, is explained. The authors offer five characteristics that promote (or are consistent with) the existence of imperfect competition: control over inputs, patents and copyrights, licenses and franchises, economies of scale, and networks. A section of the chapter is devoted to economies of scale. Fixed costs are emphasized. The treatment is rigorous and is based on characteristics of production in two hypothetical manufacturing plants. The point is made that as time passes, an increasing number of products are produced using more and more fixed costs. The implication is clear: the market oriented economy of the United States will become increasingly dominated by oligopolies – the firms that make up a technology-dependent industry. Several pages are devoted to profit maximization in an imperfectly competitive world. This section includes discussions of the downward-sloping demand curve faced by the
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This note was uploaded on 03/30/2008 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Summer '08 term at Penn State.

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Chap_10 - Chapter 10 Monopoly and Other Forms of Imperfect...

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