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20Lecture - LECTURE 20 Today is Tuesday November 2 2010 The...

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LECTURE 20 Today is Tuesday, November 2, 2010. The price of gold is $1,357.50 per troy ounce. Exactly one year ago today it was $1,091 per troy ounce. MONOPOLY Examine Figure 20-1. Figure 20-1 shows our initial market equilibrium when we first began discussing the operation of a competitive market and a competitive firm operating in a competitive industry, supplying a competitive market. 1 Figure 20-1 shows the market supply curve, which was the horizontal sum of each of the 1,000 marginal cost curves of the 1,000 competitive firms making up the Arizona gold industry. 2 The demand curve is the same demand curve for gold that we have been working with while we have been discussing the competitive model. Note that the intersection of the market supply curve and market demand curve gives us the initial equilibrium price and quantity in the market that we derived in Lecture 18, $600 per ounce and 7,000 ounces per week. Assume, like Warren Buffett, 3 we have the financial resources to purchase all 1,000 of the competitive gold mining firms that operated in our initial market equilibrium scenario, and we do so. We now have a monopoly, which literally means "one producer". On each of the 1,000 mine shafts that once made up a competitive industry, we hang a sign: Sun Devil Mining Company--Shaft #1; Sun Devil Mining Company--Shaft #2, and so on. Our original company can retain our original signage: Sun Devil Mining Company--Shaft # 212. We have, what is called in economics, a multi-plant firm . This is no big deal; McDonald's, Sony, Ford, and most big companies have multi-plant firms. Note that none of the cost structures of any of the 1,000 original competitive firms changes. Our production function for the Sun Devil Mining Company and the cost functions (remember the table of numbers?) don't change just because we bought up all the 1,000 individual competitive firms. The mine shafts don't care what the name of the person is that owns them. 1 Notice how, unlike your textbook, and all Principles textbooks, we do not use the term perfect competition, insofar as nothing in this world is perfect. It is sufficient to obtain competitive performance in a market if there exists a large number of firms supplying the market. 2 Recall that we were restricting our analysis of the gold market and gold industry to the 1,000 firms operating in Arizona, in the same way that, even though you can buy a pizza anywhere in Maricopa County, our pizza market model restricted our analysis to the eleven pizza producers in Tempe. If our eleven pizza stores had charged too much for a pizza, or ended up making significant economic profits, they would have experienced an increase in competition from other pizza producers in the area. 3 One year ago, on November 3, 2009, he bought the BNSF (Burlington Northern Santa Fe) Railroad for $34 billion. The price of a share of stock in his company, Berkshire Hathaway, closed at over $101,500 per share.
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BARRIERS TO ENTRY In general, a monopoly cannot continue to exist, (especially if the monopoly is earning monopoly profits) 4 , without a barrier to entry. Recall that when,
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