Principles of Economics- Mankiw (5th) 306

Principles of Economics- Mankiw (5th) 306 - 316 PA R T F I...

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316 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY In this chapter we examine the implications of this market power. We will see that market power alters the relationship between a firm’s price and its costs. A competitive firm takes the price of its output as given by the market and then chooses the quantity it will supply so that price equals marginal cost. By contrast, the price charged by a monopoly exceeds marginal cost. This result is clearly true in the case of Microsoft’s Windows. The marginal cost of Windows—the extra cost that Microsoft would incur by printing one more copy of the program onto some floppy disks or a CD—is only a few dollars. The market price of Windows is many times marginal cost. It is perhaps not surprising that monopolies charge high prices for their prod- ucts. Customers of monopolies might seem to have little choice but to pay what- ever the monopoly charges. But, if so, why does a copy of Windows not cost $500? Or $5,000? The reason, of course, is that if Microsoft set the price that high, fewer
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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