Econ Notes.docx - October 2 Big Ideas u25cf Monopolists...

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October 2 Big Ideas Monopolists raise prices above MC by reducing output. This makes them rich at our expense But capitalist firms can only survive with some market power. Perfectly competitive firms cannot survive Monopolies survive by controlling location, talent, technologies, reputation, or because there are economies to scale Monopolies act knowing that they can sell more only at a lower price -They think about the effect increasing production has on inframarginal sales -They produce only if marginal revenue is at least equal to marginal cost, MR=MC Perfect competition maximizes social surplus -a perfect competitor will produce wherever MU>MC and this maximizes total surplus, or the sum of consumer and producer surplus. Monopolies increase producer surplus at the expense of consumer surplus -monopolists produces less, at MR=MC and sells at a higher price -raises prices to consumers and reduces supply -monopoly reduces and transfers surplus: takes from consumers to give to monopolist Percent competitors lose on their marginal sales -perfect competitors produce at P=MC -There, MC>MR and perfect competitor loses profits -They lose their fixed costs -monopolists raise prices to where they can stay in business by making profits to cover fixed costs A monopolist is the only seller of its products -Every company that puts a name on a product is a monopolist -Have price discretion -A monopolys power to raise prices depends on how elastic the demand is for its product Perfect competition -aligns firm behavior with social benefit -under PC, firms produce until MU=MC, maximizing consumer and producer welfare -Under monopoly, firms produce less, lowering total welfare. Orthodox Economists try to wish monopoly away -They like to think that firm entry will drive away any monopoly profits -possibility of entry will force monopolists to behave Sources of monopoly and market power -economies to scale and high minimum efficient scale -Location -Lock in -talent October 7 An increase in demand will draw out more supply along the supply curve by raising the price
-Greater Demand= higher prices elicits more supply -Less Demand= lower prices and less supply Supply curve move more, or less, supplied at any price -Higher cost input-- supply curve in Producers will supply less at higher price -Cheaper inputs-- supply curve out Producers will supply more at any price

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