08mono_sg

08mono_sg - Chapter 8: Monopoly Chapter 8 Monopoly CHAPTER...

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Chapter 8: Monopoly Chapter 8 Monopoly CHAPTER SUMMARY Market power arises from unique resources, intellectual property, scale and scope economies, regulation, or product differentiation. A seller with market power restrains sales to raise the market price above the competitive level and extract higher profits. It maximizes profit by producing the quantity at which marginal revenue equals marginal cost. The extent to which a monopoly should adjust the price and sales in response to changes in demand or costs depends on the shapes of both the marginal revenue and the marginal cost curves. The profit-maximizing price and quantity does not depend on fixed costs. The profit-maximizing level of promotion for a seller with market power is the incremental margin multiplied by the elasticity of demand multiplied by the sales. A buyer with market power restrains purchases to depress the price below the competitive level and raise its net benefit. Competing sellers and, likewise, competing buyers increase profit by restraining competition. They can do so by forming a cartel or through horizontal integration. KEY CONCEPTS m o n o p o l y L e r n e r I n d e x
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Chapter 8: Monopoly 2. Analyze how a monopoly determines its profit-maximizing output and price level. 3. Explain how a monopoly should adjust price in response to changes in demand and cost. 4. Analyze how much a monopoly should spend on advertising. 5. Explain how a monopoly should adjust advertising in response to changes in price and cost. 6. Compare and contrast output and price under monopoly and perfect competition. 7. Analyze how competing sellers can raise their combined profit by restraining competition through cartels and horizontal integration. 8. Analyze how a monopsony determines its net benefit maximizing purchase and price. 9. Analyze how competing buyers can raise their combined net benefit by restraining competition. NOTES 1. Sources of market power . (a) A seller (buyer) with market power can influence market demand (supply), price and quantity demanded (supplied). (b) Monopoly : a market where there is only one seller. (c) Monopsony : a market where there is only one buyer (d) Sources of market power for monopolies and monopsonies: barriers that deter or prevent entry by competing sellers (buyers). i. Unique resources, e.g., human resources: a superstar in sport and performing arts; physical or natural resources: exclusive right to use the Eurotunnel; ii. Intellectual property, e.g., ownership of patents or copyrights over inventions or expressions. iii.
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08mono_sg - Chapter 8: Monopoly Chapter 8 Monopoly CHAPTER...

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