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15 Econ Class notes - Ch 15 Monopoly I Competitive firms...

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Ch. 15 Monopoly I. Competitive firms are price takers (let market choose price and take it as given) a. Monopolies are price makers (decide on the price by themselves) II. Fundamental cause of a monopoly is the barrier to entry a. Monopoly resources i. A monopoly has sole ownership of a key resource used to produce the good ii. Case Study: DeBeers Diamond Monopoly b. Government created monopoly i. The government can grant a firm sole rights to sell a product or service ii. Parents are issued by the government to give firms the right to produce the product for 20 years iii. Patents also include a tradeoff 1. patents restrict competition but they also encourage research and development c. Natural monopoly i. Monopoly that arises because a firm can supply a good or service to an entire market at a lower cost than 2 or more firms III. How do monopolies make pricing decisions? i. Monopolies price their product according to consumer’s willingness to pay ii. TR=P*Q iii. AR=P (directly related to quantity demanded iv.
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