IMCH12new07 - Chapter 12 Monopoly Chapter Summary According...

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Chapter 12 Monopoly Chapter Summary According to the text, "the key feature that differentiates monopoly from competition is the price elasticity of demand." The five sources of monopoly power are (1) exclusive control over important inputs, (2) economies of scale, (3) patents, (4) government licenses, and (5) the network economy. The first section discusses profit-maximizing strategy for a monopolist. It explores the revenue of the firm showing how the total, average and marginal revenue functions relate to each other. Marginal revenue is falling while total revenue rises and when it peaks margainal revenue is zero. begins with a discussion of the relation between the demand curve facing the monopolist and the total revenue curve. Next marginal revenue is defined, including the fact that total revenue is maximized where marginal revenue equals zero. The revenue functions and demand elasticity show that firms will profit maximize when demand is elastic which is where marginal revenue is positive. The amount of markup over marginal cost will demand on the elasticity of demand at the profit maximizing output. One can identify the shut down point in any given situation as the loss minimizing output level which can not provide a price high enough to cover average variable cost. Because monopolists alter their price as demand changes it is impossible to identify a specific supply curve for the firm. In the long run, monopolists equate long run marginal cost to marginal revenue producing as long as price equals or exceeds average costs. The three types of price diecrimination illustrate ways in which monopolists try to capture some of the consumer surplus. Monopolists underproduce except when they perfectly price discriminate. The chapter concludes with a discussion of five different ways that public policy can deal with monopolies. The method used will depend on the nature of a market and the type of output being produced. Finally, the concern that monopolies suppress innovation is most likely overplayed because profits from innovation will often exceed profits from maintaining the staus quo. Chapter Outline Chapter Preview Defining Monopoly Five Sources of Monopoly The Profit-Maximizing Monopolist A Monopolist Has No Supply Curve Adjustments in the Long Run Price Discrimination The Efficiency Loss from Monopoly Public Policy toward Natural Monopoly Monopolies and Innovation Summary Teaching Suggestions 1. In one sense monopoly is easier than other market forms because the demand of the market is the demand of the firm. This advantage will disappear fast, however, if the derivation of the marginal revenue function is not understood well. As always, the graphical, mathematical, and intuitive understanding is necessary before one can start drawing MR simply at twice the slope of the straight line demand functions. I find it helpful to introduce at the very beginning of this chapter the idea of price discrimination because students live with it enough to have a good grasp of it, and because the absence
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This note was uploaded on 09/16/2011 for the course ECON/ACCOU 101 taught by Professor Jang,hajoon during the Spring '11 term at Korea University.

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IMCH12new07 - Chapter 12 Monopoly Chapter Summary According...

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