Special Case - been working with then it is likely that a...

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Special Case: Monopolies Monopolists will find their profit-maximizing point by finding the intersection between their downward-sloping MR curve and their MC curve. Note that in a monopolist market, MR does not equal D, so the profit-maximizing point chosen by a monopolist results in higher prices and lower consumption than in a competitive market. Figure %: Demand for a Monopolist Monopolists are able to sell their products at well above their marginal cost, thereby earning much higher profits than competitive firms: Figure %: Profits for a Monopolist In certain markets there are natural monopolies, monopolies that will naturally occur in the market (as opposed to a monopoly that occurs because one firm pushes or buys other firms out). What kind of market would naturally lead to the formation of a monopoly? If there is a product that has a downward- sloping average cost curve (as opposed to the U-shaped curves we have
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Unformatted text preview: been working with), then it is likely that a natural monopoly will form. Figure %: Natural Monopoly Why is this true? Let's say that in the market for computers, Eliot Computer Lab ("ECL") gets a head start on production, and has already made 1000 units before its competitors get started. At that point, ELC has a much lower average cost than the new firms, and therefore has a significant advantage over its competitors, since it can charge lower prices and make more profits. If it ever feels threatened by new firms, it can increase production and lower the price even more, so that the new firms cannot compete, since they are still further back on the cost curve. In such a case, ECL would have a natural monopoly in the computer market, and other firms would exit the market....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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Special Case - been working with then it is likely that a...

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