Econ Exam III Study Guide - Econ Exam III Study Guide...

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Econ Exam III Study Guide MONOPOLY Monopoly - Single firm that controls the market for a product (Produces and sells it in an area) They are price setters . They can raise the price and retain sales However, how much market power they have relies on their elasticity of demand o The more inelastic the curve, the more market power because the demand changes less o However, the more elastic, the less market power they have More substitute = more elastic There are monopolies for several reasons 1. License or franchise from govt 2. Patents o Usually lasting 16 yrs o The patent system tends to be rather inefficient. Because it is so specific, usually other companies can make other products that do the same thing w/ a few differences even though they’re violating the “spirit of the patent” It’s usually up to the courts at that point. o This also increases incentive to research and develop new things o Generic brands come out when patent expires (medicine i.e.) 3. Control over all/ one resources necessary for production (Alcoa i.e.) Trough luck/ force/ collusion though firms will be stopped eventually 4. Natural Monopoly long economies of scale (producing/ selling larger quantities gets cheaper and cheaper) Also, new firms wont be able to compete after a certain point that the original monopoly has built up to o However, firms don’t usually take advantage of the economies of scale, They set price high and make a lower quantity. So the govt steps in This is how a whole town gets electric service from one co. i.e 5. Brand loyalty - Makes it hard for other firms to enter the industry and get established (this is how we got Kleenex and Band-Aid etc) Since there is only one seller, the demand for the firm is also the market demand To sell more, the monopoly always has to lower price . But MR always falls quicker , b/c they will never get as much selling more at a lower price (since each unit’s price is less than before). Revenue rises at a decreasing rate o Q1 is the point of Unitary elasticity (ED = 1), where MR = 0
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o Above Q1 Elasticity of demand is greater than one (elastic) and below it is inelastic. Because of this we can see the where the TR curve rises and falls (TR falling when you lower price and it increases demand) o A monopoly always has to operate in the elastic section of the curve because in the inelastic section MR would be negative. MC also have to positive and it can’t intersect MR in the negative area When demand is linear, MR falls exactly twice as fast as price. Keep in mind, cost doesn’t change . The firm is profit maximizing were MR= MC. Then the price goes up to the demand curve. (Keep in mind the firms covers VC if it covers AVC so it should produce, but if it’s above AC, it’s
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This note was uploaded on 09/08/2011 for the course ECON 2002 taught by Professor Kogut during the Spring '11 term at University of Louisiana at Monroe.

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Econ Exam III Study Guide - Econ Exam III Study Guide...

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