ch14 - Chapter 14 Monopoly Monopoly A monopoly is a single...

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Chapter 14 Monopoly
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Monopoly A monopoly is a single supplier to a market This firm may choose to produce at any point on the market demand curve A monopoly exists because other firms find it unprofitable or impossible to enter the market Barriers to entry are the source of all monopoly power there are two general types of barriers to entry technical barriers legal barriers
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Technical Barriers to Entry Marginal and average costs of producing a good may be decreasing over a wide output range relatively large-scale firms are low-cost producers it may be profitable to drive others out by cutting prices this situation is known as natural monopoly once the monopoly is established, entry is difficult Special knowledge of low-cost production technique it may be difficult to keep this knowledge out of the hands of other firms Ownership of unique resources
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Legal Barriers to Entry Many pure monopolies are created as a matter of law with a patent, the basic technology for a product is assigned to one firm the government may also award a firm an exclusive franchise to serve a market
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Creation of Barriers to Entry Some barriers to entry result from actions taken by the firm research and development of new products or technologies purchase of unique resources lobbying efforts to gain monopoly power The attempt by a monopolist to erect barriers to entry may involve real resource costs
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Profit Maximization To maximize profits, a monopolist produces the output level for which marginal revenue equals marginal cost marginal revenue is less than price because she faces a downward-sloping demand curve the price on all units to be sold must be lowered to generate the extra demand for this unit Since MR = MC at the profit-maximizing output and P > MR for a monopolist, the monopolist will set a price greater than marginal cost
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C Profits can be found in the shaded rectangle Profit Maximization AC MC D MR Quantity Price Q* The monopolist will maximize profits where MR = MC P* The firm will charge a price of P *
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The Inverse Elasticity Rule The gap between a firm’s price and its MC is inversely related to its price elasticity of demand P Q e P MC P , 1 - = - e Q,P is the elasticity of demand for the entire market Two general conclusions about monopoly pricing : a monopoly chooses to operate only in regions where market demand curve is elastic ( e Q,P < -1) the firm’s “markup” over marginal cost depends inversely on the elasticity of market demand
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Monopoly Profits Monopoly profits will be positive as long as P > AC Monopoly profits can continue into the long run because entry is not possible some refer to the profits that a monopoly earns in the long run as monopoly rents the return to the factor that forms the basis of the monopoly The size of monopoly profits in the long run will depend on the relationship between average costs and market demand for the product
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Monopoly Profits Quantity Price MC AC MR D Quantity Price MC AC MR D Positive profits Zero profit P * P *= AC C Q * Q *
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This note was uploaded on 11/06/2009 for the course ECON ECON111 taught by Professor Smith during the Spring '09 term at Punjab Engineering College.

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ch14 - Chapter 14 Monopoly Monopoly A monopoly is a single...

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