CHAPTER 13 - CHAPTER 13: MONOPOLY I. Monopoly & How It...

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CHAPTER 13: MONOPOLY I. Monopoly & How It Arises a. Monopoly-a market with a single firm that produces a good or service for which no close substitutes exist, and that is protected by a barrier that prevents other firms from selling that good or service b. How Monopoly Arises b.i. Has no close substitutes b.ii. Barrier to entry-a constraint that protects a firm from potential competitors b.ii.1. Natural barrier to entry b.ii.1.a. Creates natural monopoly-economies of scale enable one firm to supply the entire market at the lowest possible cost b.ii.2. Ownership Barrier to Entry b.ii.2.a. One firm owns a significant proportion of a key resource b.ii.3. Legal Barrier to Entry b.ii.3.a. Creates a legal monopoly-a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright b.ii.3.b. Public franchise-an exclusive right granted to a firm to supply a good or service b.ii.3.c. Government license- controls entry into particular occupations, professions, and industries (doesn’t always create a monopoly, but does restrict competition) b.ii.3.d. Patent- exclusive right granted to the inventor of a product or service b.ii.3.e. Copyright-exclusive right granted to the author, composer of a literary, musical, or artistic work c. Monopoly Price-Setting Strategies c.i. Monopoly sets its own price c.ii. Single Price Monopoly-a firm that must sell each unit of its output for the same price to all customers c.iii. Price discrimination-sells different units of a good or service for different prices II. A Single-Price Monopoly’s Output & Price Decision a. Price and MR
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a.i. The demand curve facing the firm is the market demand curve a.ii. TR=PxQ a.iii. MR=ΔTR÷ΔQ sold a.iv. At each level of output, MR is less than P—MR curve lies below the demand curve b. MR & Elasticity b.i. Demand=Elastic 1% in Price, brings a greater than 1% Quantity demanded b.i.1. b.ii. Demand=Inelastic 1% in Price, brings a less than 1% in Quantity demanded b.ii.1. Fall in price brings a decrease in TR & MR- b.iii. Demand=Unit Elastic 1% in Price, brings a 1% in Quantity demanded b.iii.1. b.iv. In Monopoly, Demand is Always Elastic b.iv.1. Profit maximizing monopoly NEVER produces an output in inelastic range of the market D curve c. Price and Output Decision c.i. A monopoly sets its price and output at the levels that maximize economic profit c.ii. Faces the same types of technology and cost constraints as a
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CHAPTER 13 - CHAPTER 13: MONOPOLY I. Monopoly & How It...

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