11-Monopoly - Monopoly (Chapter 15) Introductory...

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Monopoly (Chapter 15) Introductory Microeconomics, Mankiw et al. 5th Canadian Edition Introduction to Microeconomics (ECO 1104F) University of Ottawa
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Look for answers to these questions: 1. Why do monopolies arise? 2. Why is MR < P for a monopolist? 3. How do monopolies choose their P and Q ? 4. How do monopolies affect society’s well- being? 5. What can the government do about monopolies? 6. What is price discrimination?
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Exists when: § Many firms sell an identical product to many buyers § There are no restrictions on entry into (or exit from) the market. § Established firms have no advantage over new firms. § Sellers and buyers are well informed about prices. Perfect Competition: A Reminder
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Monopoly A market for a good or service § that has no close substitutes § in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. In this chapter, we study monopoly and contrast it with perfect competition. The key difference § a monopoly firm has market power, that is, 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 government gives a single firm the exclusive right to produce the good (e.g., patents, copyright laws) [i.e., a legal barrier]
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Why Monopolies Arise 3. Natural monopoly: a single firm can produce the entire market Q at lower ATC than could several firms (i.e., a natural barrier). Q Cost ATC 1000 $50 Example: 1000 homes need electricity. Electricity Economies of scale due to huge FC ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. 500 $80
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Natural Monopoly One firm can meet the market demand at a lower cost than two or more firms can.
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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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Moonbucks 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
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This note was uploaded on 01/21/2012 for the course ECO 1104 taught by Professor Crabbe during the Winter '08 term at University of Ottawa.

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11-Monopoly - Monopoly (Chapter 15) Introductory...

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