chap12_302-sp100 - Chapter 12 MONOPOLY 1 Chapter Goals...

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1 Chapter 12 MONOPOLY
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2 Chapter Goals Defining monopoly Sources of monopoly: control over key inputs economics of scale patents network economies government licenses Monopolist behavior: One market Several markets Efficiency properties of monopoly equilibrium
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3 Defining monopoly A monopoly is a market structure in which a single seller of a product with no close substitute serves the entire market . The key feature that differentiates the monopoly from the competitive firm is the price elasticity: For a perfectly competitive firm, price elasticity is infinite: a slight rise in price will result in the loss of all sale. A monopoly by contrast has significant control over the price it charges. Demand curve facing the individual competitive firm is horizontal, while the monopolist’s demand curve is simply the downward-sloping demand curve for the entire market.
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4 Five Sources of Monopoly 1.Exclusive Control over Important Inputs: Bottled mineral water sold by Perrier Corporation deBeers Diamond Mines control over most of the world’s supply of raw diamonds. 2. Economies of Scale: When the long-run average cost curve (given fixed input prices) is downward sloping, the least costly way to serve the market is to concentrate production in the hands of a single firm. A market that is most cheaply served by a single firm is called a natural monopoly .
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5 3. Patents: A patent system protect inventions. A patent typically confers the right to exclusive benefit from all exchanges involving the invention to which it applies. Benefits and costs of patent : Benefits: The patent makes possible a great many inventions that would not otherwise occur. If a firm were unable to sell its product for a sufficiently high price to recoup these outlays, it would have no economic reason to undertake research and development. Costs: The monopoly that the patent creates usually leads to higher prices for consumers.
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6 4. Network Economies: Demand for good Number of consumers (+) (+) (+) Consumers’ preferences are said to exhibit network externalities if the utility of each consumer increases with an increase in the total number of consumers purchasing the same or a compatible brand. Therefore on the demand side a product becomes more valuable as greater numbers of consumers use it. ) , ( X N X U U =
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7 5. Government Licenses or Franchises: - Exclusive licenses and franchises are a source of monopoly: Government license is required for taxis. Many college campuses sell exclusive rights to vending machine sales. - Some of licenses are for raising revenue but many of government licenses are merely an implicit recognition of scale economies that would lead to monopoly in any event.
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8 Perfectly competitive firm faces a perfectly elastic market demand P Q P* $/unit of time TR = P* Q Slope = P* Q P Q Monopoly faces a the market demand $/unit of time Q TR=P*Q
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This note was uploaded on 02/14/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.

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chap12_302-sp100 - Chapter 12 MONOPOLY 1 Chapter Goals...

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