Econ_100_Ch11

Econ_100_Ch11 - ECON 100: Introduction to Microeconomic...

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Slide 1 of 36 ECON 100: Introduction to Microeconomic Theory Lecture 13 Yilan Xu
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Slide 2 of 36 Monopoly Competitive forces tend to drive price down to the average cost of production. Some situations exist, however, that prevent competitive forces from operating to this end. Monopoly Power refers to the ability of a firm to raise price above average cost without fear of other firms entering the market.
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Slide 3 of 36 Monopoly Monopoly power arises because of barriers to entry. Sources of monopoly power: 1. Government action 2. Economies of scale 3. Exclusive access to an important input 4. Technological innovation
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Slide 4 of 36 Monopoly Summary of Sources of Monopoly Power Source Example Patents GlaxoSmithKline’s Patent on Combivir Laws Preventing Entry The Indonesian Clove Monopoly, The Algerian Wheat Monopoly, The U.S. Post Office Economies of Scale Subways, Cable TV, Electricity Transmission, Major Highways Hard to Duplicate Inputs Oil, Diamonds, Rolex Watches Innovation Apple’s iPod, Mathematica Software, eBay
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Slide 5 of 36 Monopoly Regardless of the source, a firm with monopoly power will seek to maximize profits. Such a firm, however, has a more difficult task in achieving this objective than a competitive firm. Since a firm with monopoly power produces a large share of the market’s total output (perhaps all of the output), its production decision influences the market price. Thus, a firm with monopoly power must choose a profit-maximizing level of output and price.
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Slide 6 of 36 Monopoly and Profit Maximization To maximize profit a firm with monopoly power will expand production until the revenue from an additional sale equals the cost of an additional sale. Or, Marginal Revenue = Marginal Cost (MR=MC).
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Monopoly and Profit Maximization A firm with monopoly power is constrained, however, in its pricing decision by the market demand curve for the product. The firm will use the point on the market
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This note was uploaded on 02/17/2012 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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Econ_100_Ch11 - ECON 100: Introduction to Microeconomic...

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