ECO3041 - Ch 7 Monopoly

ECO3041 - Ch 7 Monopoly - Department of Economics, FIU...

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Department of Economics, FIU Chapter 7 Notes Prof. Dacal
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Chapter 7 Notes Chapter 7 Monopoly I. Monopoly Structure Market Power is when “a company [has the] ability to manipulate price by influencing an item's supply, demand or both. A company with market power would be able to affect price to its benefit. Firms with market power are said to be "price makers" as they are able to set the price for an item while maintaining market share . Generally, market power refers to the amount of influence that a firm has on the industry in which it operates.” 1 Market demand is the total quantities of good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands. Monopoly = industry Monopolies arise when : 1. No Close Substitute a. If a good has a close substitute, even though only one firm produces it, that firm effectively faces competition from the producer of substitutes. 2. Barriers to Entry a. Barrier to entry – It’s a natural or legal constraint that protects a firm from competitors. b. Patent is a government grant of exclusive ownership of an innovation. When we are faced with a monopoly, the firms demand is equal to the market demand for that given product Price vs. marginal revenue Marginal revenue is the change in total revenue that results from a one-unit increase in quantity sold. 1 (Inverstopedia ULC 2010) 2 | P a g e
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Therefore the MR is equal to change in total revenue. Q 1 = 1 P 1 = 10 TR 1 = 10 Q 2 = 2 P 2 = 9 TR 2 = 18 MR = 8 This process continues and when the MR stops increasing it means that we have derived the price at which a firm obtains maximum TR. MR = 0 The marginal revenue curve lies below the demand curve at every point but the first. The MR is less than P because when the P is lowered to sell one more unit two opposing forces affect TR: 1. The lower P results in revenue loss. 2. The increase in Q sold results in a revenue gain. II. Monopolistic Behavior A monopolist is a price setter not a price taker. A Price setter “[establishes] the price of a product or service, rather than allowing it to be determined naturally through free market forces. A monopoly does this by first establishing its profit maximizing quantity.” 2 Profit Maximization Profit maximization rule stats that one will produce at the rate of output where marginal revenue is equal to marginal cost MR = MC Monopolists do not use P = MC, only perfectly competitive markets use it. This is what monopolists do. 2
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This note was uploaded on 01/22/2012 for the course ECO 3041 taught by Professor Dacal during the Fall '11 term at FIU.

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ECO3041 - Ch 7 Monopoly - Department of Economics, FIU...

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