Lesson7_Monopoly.pdf - Monopoly Mankiw Chapter 15 Monopoly • Monopoly market in which there is a single supplier of a product without close

Lesson7_Monopoly.pdf - Monopoly Mankiw Chapter 15 Monopoly...

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Monopoly Mankiw, Chapter 15
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Monopoly Monopoly : market in which there is a single supplier of a product without close substitutes. This firm is called the monopolist . Immediate implication: the firm is not a price taker, but a price maker . In other words, the firm has market power . The market power is a market failure : reason for which the market outcome does not coincide with the outcome under perfect competition (that is, the TS is not maximized). The market failure justifies the public intervention to improve the outcome. But, as we will see, there is no perfect intervention . 2
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Why do Monopolies Arise? Always because of entry barriers to competitors. These barriers are of three types: 1. Monopoly resources : a single firm is the owner of an essential resource (De Beers owns most of the world’s diamond mines). 2. Government regulation : the government gives to a single firm the exclusive right to produce some good or service (patents, lobbies). 3. Production process : a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. This situation is a Natural Monopoly . 3
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Natural Monopoly Caused by economies of scale : the average total cost is decreasing. Characteristic of products with high fixed costs : electricity, gas, train Given a production level, when it is divided among two or more firms, each firm produces less than the total and the average total cost raises. Then, a single firm produces any given quantity at the minimum possible cost . Lesson for competitors: entering a market in which another firm has a natural monopoly is unattractive . 4 Q ATC In some cases, the size of the market is one determinant of whether an industry is a natural monopoly (hint: check slide 6 of Lesson 4).
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Demand Curve faced by the Competitive Firm In a competitive market, the market demand slopes downward.
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