L11-Monopoly and Oligopoly

L11-Monopoly and Oligopoly - Monopoly Monopoly What is...

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Monopoly Monopoly What is Monopoly? Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q ? How do monopolies affect society’s well-being? What is price discrimination? 1
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Introduction A monopoly is a firm that is the sole seller of a product without close substitutes. 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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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. E.g. , patents, copyright laws
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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 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 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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Class Exercise    Class Exercise    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 is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. What is the relation between P and AR ? Between P and MR ?
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Class Exercise  Class Exercise  Answers Answers 8 Here, P = AR , same as for a competitive firm. Here, MR < P , whereas MR = P for a competitive firm. 1.50 6 2.00 5 2.50 4 3.00 3 3.50 2 1.50 2.00 2.50 3.00 3.50 $4.00 4.00 1 n.a. 9 10 10 9 7 4 $ 0 $4.50 0 MR AR TR P Q –1 0 1 2 3 $4
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Common Grounds’  D   and  MR   Curves -3 -2 -1 0 1 2 3 4 5 0 1 2 3 4 5 6 7 Q P , MR MR $ Demand curve ( P ) 1.50 6 2.00 5 2.50 4 3.00 3 3.50 2 4.00 1 $4.50 0 MR P Q –1 0 1 2 3 $4
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Increasing Q has two effects on revenue: Output effect : higher output raises revenue Price effect : lower price reduces revenue To sell a larger Q , the monopolist must reduce the price on all the units it sells. Hence,
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L11-Monopoly and Oligopoly - Monopoly Monopoly What is...

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