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Unformatted text preview: 15 Monopoly Goals In this ch a pt e r you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopolys decisions affect economic well-being Consider the various public policies aimed at solving the problem of monopoly See why monopolies try to charge different prices to different customers Outcomes After a c c o m p lishin g thes e go als, you should b e abl e to List three reasons why a monopoly can remain the sole seller of a product in a market Use a monopolists cost curves and the demand curve it faces to show the profit earned by a monopolist Show the deadweight loss from a monopolists production decision Show why forcing a natural monopoly to charge its marginal cost of production creates losses for the monopolist Demonstrate the surprising result that price discrimination by a monopolist can raise economic welfare above that generated by standard monopoly pricing Chapter Overview Context and Purpose Chapter 15 is the third chapter in a five-chapter sequence dealing with firm behavior and the organization of industry. Chapter 13 developed the cost curves on which firm behavior is based. These cost curves were employed in Chapter 14 to show how a competitive firm responds to changes in market conditions. In Chapter 15, these cost curves are again employed, this time to show how a monopolistic firm chooses the quantity to produce and the price to charge. Chapters 16 and 17 will address the decisions made by oligopolistic and monopolistically competitive firms. A monopolist is the sole seller of a product without close substitutes. As such, it has market power because it can influence the price of its output. That is, a monopolist is a price maker as opposed to a price taker. The purpose of Chapter 15 is to examine the production and pricing decisions of monopolists, the social implications of their market power, and the ways in which governments might respond to the problems caused by monopolists. Chapter Review Introduction Monopolists have market power because they can influence the price of their output. That is, monopolists are price makers as opposed to price takers . While competitive firms choose to produce a quantity of output such that the given market price equals the marginal cost of production, monopolists charge prices that exceed marginal cost. In this chapter, we examine the production and pricing decisions of monopolists, the social implications of their market power, and the ways in which governments might respond to the problems caused by monopolists. Why Monopolies Arise A monopoly is a firm that is the sole seller of a product without close substitutes. A monopoly is able to remain the only seller in a market only if there are barriers to entry . That is, other firms are unable to enter the market and compete with it. There are three sources of barriers to entry:the market and compete with it....
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- Spring '11