Monopoly - Monopoly Lectures SupratimDasGupta/JoeDance...

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Monopoly Lectures Supratim Das Gupta/Joe Dance
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Key Questions to Address: Why do monopolies arise? Why is MR<P for a monopolist? How do monopolies choose their P and  Q? What are the welfare effects of  monopolies? What can the government do about  monopolies? What is price discrimination?
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3 Introduction monopoly  is a firm that is the sole seller of a  product without close substitutes.  The key difference b/w a  monopoly  and a  competitive firm : A Monopoly has  market power- ability to influence the price of the product it  sells Competitive firm has no market power-takes  price in the market as given
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4 Why Monopolies Arise The main cause of monopolies is  barriers to  entry  – other firms cannot enter the market Three sources  of barriers to entry: A single firm owns a key resource- ex.  DeBeers owns most of the world’s diamond  mines The govt. gives a single firm the exclusive right  to produce the good-  Ex.  patents, copyright  laws A single firm can produce output at a lower  cost than can a large no. of producers-also 
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5 Natural Monopoly Natural monopoly :  a single firm can  produce the entire market  Q  at lower cost  than could several firms.   Q ATC ATC 1000 $50 Example:  1000 homes  need electricity    Electricity Firm with ATC  sloping  downward due  to economies of  scale ATC  is lower if  one firm services  all 1000 homes  than if two firms  each service  500 homes. 500 $80
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6 Monopoly vs. Competition:  Demand  Curves In a competitive market,  the market  demand curve  slopes downward.  But the demand curve  for any individual firm’s  product is horizontal  at the market price.  The firm can increase  Q   without lowering  P , so  MR  =  P   for the  competitive firm.  D P Q A competitive firm’s demand curve
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This note was uploaded on 06/03/2011 for the course ECON 224 taught by Professor Ozturk during the Fall '09 term at South Carolina.

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Monopoly - Monopoly Lectures SupratimDasGupta/JoeDance...

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