lec1 - 1 1 Monopoly: Chapter 14 Monopoly: Chapter 14 Try...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 1 Monopoly: Chapter 14 Monopoly: Chapter 14 Try problems 14.1-14.8 Reason for monopoly: barriers to entry prevent entrance of new firms that would undercut the monopoly price technical barriers legal barriers 2 Technical Barriers: Decreasing Returns to Scale Technical Barriers: Decreasing Returns to Scale Over Large Range Relative to the Size of the Market Over Large Range Relative to the Size of the Market If minimum efficient scale is small relative to the market, then the market will support many firms Technical conditions may make some monopoly inevitable, since the market will only support one firm The size of the market may reflect government policy: nonrestrictive trade policies can expand the size of the market and cut monopoly prices 2 3 P q AC D P q D AC MES MES Technical Barriers Make Monopoly Inevitable in Some Markets Case 2: Economies of scale mean that this industry will consist of one firm Case 1: This market will support many firms, and one firm will not have monopoly power 4 Many Monopolies Are Created by Many Monopolies Are Created by Legal Barriers to Entry Legal Barriers to Entry Government grants and enforced special market privileges in some cases patents encourage innovation copyrights protect intellectual property Franchises from government assure firm owners that competition will be limited Natural monopoly in some cases like utilities government may grant a monopoly and regulate firm behavior policymakers sometimes lose sight of which market has a natural monopoly 3 5 Monopoly Decision Rule: Produce Q Where Monopoly Decision Rule: Produce Q Where MR=MC, Price Q Along the Demand Curve MR=MC, Price Q Along the Demand Curve Monopoly profits depend on the relationship between AC and demand Monopoly does not necessarily imply high profits In some cases, AC=P at the monopoly price, so the firm just breaks even If AC>P, the firm will shutdown permanently Entry barriers mean that firm will earn long run profits profits or rents reflect unique factor that creates the monopoly the firm may sell the patent rights or concession to produce output 6 Graph of Situation Where Monopoly Graph of Situation Where Monopoly Earns Zero Profits Earns Zero Profits P q AC D MR MC q* P* 4 7 Welfare Analysis of Monopoly Welfare Analysis of Monopoly Consider competition versus monopoly P>MC in monopoly P=MC in competition Is monopoly Pareto efficient? individuals are willing to pay more for the good than the cost of production, so the monopoly solution is not pareto efficient a monopolist will not sell more than q m units, because it would have to reduce the price on all inframarginal units we assume for now that the monopolist must charge one price for its product 8 A Comparison of Competition and Monopoly Comparison of Competition and Monopoly q D MR MC q m P m q c P c P B C If a competitive market is monopolized, consumers lose A+B from consumer surplus producer gains A in extra profits, but loses C The total deadweight welfare loss is B+C. 5...
View Full Document

Page1 / 79

lec1 - 1 1 Monopoly: Chapter 14 Monopoly: Chapter 14 Try...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online