Lecture_15 - Lecture (chapter 15: Monopoly) Introduction A...

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Lecture (chapter 15: Monopoly)
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MONOPOLY 2 Introduction A monopoly is a firm that is the sole seller of a product without close substitutes. In this chapter, we study monopoly and contrast it with perfect competition. The key difference: A monopoly firm has market power , the ability to influence the market price of the product it sells. A competitive firm has no market power.
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MONOPOLY 3 Why Monopolies Arise The main cause of monopolies is barriers to entry – other firms cannot enter the market. Three sources of barriers to entry: 1. A single firm owns a key resource. E.g. , DeBeers owns most of the world’s diamond mines 2. The govt gives a single firm the exclusive right to produce the good.
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MONOPOLY 4 Why Monopolies Arise 3. Natural monopoly : a single firm can produce the entire market Q at lower cost than could several firms. Q Cost ATC 1000 $50 Example: 1000 homes need electricity Electricity ATC slopes downward due to huge FC and small MC ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. 500 $80
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MONOPOLY 5 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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MONOPOLY 6 Monopoly vs. Competition: Demand Curves A monopolist is the only seller, so it faces the market demand curve. To sell a larger Q , the firm must reduce P . Thus, MR P . D P Q A monopolist’s demand curve
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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         A monopoly’s revenue A monopoly’s revenue 7 Q P TR AR MR 0 $4.50 1 4.00 2 3.50 3 3.00 4 2.50 5 2.00 6 1.50 n.a. Common Grounds
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Lecture_15 - Lecture (chapter 15: Monopoly) Introduction A...

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