14536299-Monopoly - Chapter 14 MODELS OF MONOPOLY Dr S Chen...

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1 Chapter 14 MODELS OF MONOPOLY Dr. S. Chen Microeconomics, Ec2201 2009 Spring
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2 Monopoly A monopoly is a single supplier to a market This firm can choose to produce at any point on the market demand curve
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3 Barriers to Entry The reason why a monopoly exists is that 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
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4 Technical Barriers to Entry The production of a good may exhibit decreasing marginal and average costs over a wide range of output levels in this situation, relatively large-scale firms are low-cost producers
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5 Technical Barriers to Entry Another technical basis of monopoly is special knowledge of a low-cost productive technique it may be difficult to keep this knowledge out of the hands of other firms
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6 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
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7 Creation of Barriers to Entry Some barriers to entry result from actions taken by the firm research and development of new products or technologies
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8 Profit Maximization To maximize profits, a monopolist will choose to produce that output level for which marginal revenue is equal to marginal cost marginal revenue is less than price because the monopolist faces a
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Marginal Revenue Curve D MR Quantity Price A monopolist must have P > MR
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10 Profit Maximization Since MR = MC at the profit-maximizing output and P > MR for a monopolist, the monopolist will set a price greater than marginal cost P>MC.
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11 AC* 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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12 The Inverse Elasticity Rule The gap between a firm’s price and its marginal cost is inversely related to the price elasticity of demand facing the firm P Q e P MC P , 1 - = - Q,P
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13 The Inverse Elasticity Rule Two general conclusions about monopoly pricing can be drawn: a monopoly will choose to operate only in regions where the market demand
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14 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 economists refer to the profits that a monopoly earns in the long run
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15 Monopoly Profits 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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16 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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17 No Monopoly Supply Curve With a fixed market demand curve, the supply “curve” for a monopolist will only be one point the price-output combination where MR = MC
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18 Monopoly with Linear Demand Suppose that the market for frisbees has a linear demand curve of the form Q = 2,000 - 20 P or P = 100 - Q /20 The total costs of the frisbee producer are given by C ( Q ) = 0.05 Q + 10,000
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