Chap14 - Krugman and Wells Chapter 14 Steven J Haider EC201 Spring 2010 Overview Chapter 3-7 10-13 develops and use competitive model Chapter 9

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Krugman and Wells hapter 14 Chapter 14 Steven J. Haider EC201 Spring 2010
Background image of page 1

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

View Full DocumentRight Arrow Icon
Overview Chapter 3-7, 10-13: develops and use competitive odel model hapter 9: develops optimal decision making a little Chapter 9: develops optimal decision making a little This chapter: we move to the polar opposite model-- monopoly Perfect competition: many small producers Monopoly: one large producer Key change: monopolists are not price takers ey effect: MR=P is not true for monopolists Key effect: MR P is not true for monopolists inally we get to see a model other than the competitive model EC201-14-p2 Finally we get to see a model other than the competitive model….
Background image of page 2
Types of market structure Fig 14-1: types of market structure We’ve done perfect competition We now do monopoly Monopoly is usually no more realistic than perfect competition It shows the opposite end of spectrum Key factor: outside the competitive model, firms have market power The ability to raise prices This intuition carries over to EC201-14-p3 O. and M.C.
Background image of page 3

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

View Full DocumentRight Arrow Icon
Why market power matters With the ability to affect price, one can reduce quantity to qy push price up relative to perfect competition perfect competition price In perfect competition, price is always driven down to minimum ATC—no profits creasing price can Increasing price can increase profits t another a a Put another way: a monopolist gets the whole demand curve—and can decrease quantity to increase price EC201-14-p4
Background image of page 4
Why do monopolies exist? Because there will be economic profits, there must be a barrier to entry for the profits to remain y p Control of a scare resource DeBeers has a monopoly because it controls most of the world’s iamonds diamonds Increasing returns to scale Recall definition (chap 12): a firm that faces declining LRATC. Implication: a larger firm faces lower costs. Example: natural gas company—there is a large fixed to getting gas to a neighborhood, and the additional cost to adding more households is very small Such a monopoly is called a natural monopoly echnological superiority Technological superiority Example: Intel during 1970’s through 1990’s. Perhaps thought of as another example of scarce resources ? The carce source sufficient creativity/technological ability EC201-14-p5 scarce resource is sufficient creativity/technological ability
Background image of page 5

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

View Full DocumentRight Arrow Icon
Why do monopolies exist? Network externalities ot listed separately but I think ey hould be Not listed separately, but I think they should be Example: there is an advantage to standardizing on Beta/VHS tapes or Blu-Ray/Hi Def DVD or a particular operating system NOTE: the superior technology may not be chosen, but once a standard is, it is difficult to change overnment reated barriers Government-created barriers Patent/copyright law Example: patent protects name brand drugs, despite it being possible for other companies to copy Justification: incentive to innovate when fixed costs are high EC201-14-p6
Background image of page 6
Monopoly vs. Perfect Competition
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/18/2010 for the course ECONOMIC Ec 201 taught by Professor Haider during the Spring '10 term at MSU - Iligan Inst of Tech.

Page1 / 25

Chap14 - Krugman and Wells Chapter 14 Steven J Haider EC201 Spring 2010 Overview Chapter 3-7 10-13 develops and use competitive model Chapter 9

This preview shows document pages 1 - 8. Sign up to view the full document.

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