Economics_Ch08

If it sells 1000 units its profit is 4000 the

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Unformatted text preview: above its average total cost. For example, if a firm sells its good for \$10 and average total cost (per-unit cost) is \$6, then it earns \$4 profit per unit. If it sells 1,000 units, its profit is \$4,000. The monopolist sells its product for the highest price possible, but nothing guarantees that this price is greater than the monopoly seller’s average total cost. If it is not, the monopoly seller does not earn any profits. If average total cost for the monopoly seller is actually higher than the highest possible price for which it sells its product, the monopoly seller earns a loss (not a profit). If this situation continues, the monopoly seller will go out of business. Tony has gone into business; he sells a good that no one else sells. EXAMPLE: EXHIBIT 8-1 Is Is the Sky the Limit Sky the for the Monopolist? for Monopolist? Demand for medicine Price 08 (186-221) EMC Chap 08 \$100 0 500,000 Bottles of medicine Once a monopoly firm decides on its quantity of output, it is limited to the highest price it can charge (per unit) for the product. Specifically, it is limited by the height of the demand curve. In this case the monopoly firm decides to produce 500,000 bottles of medicine. The highest price it can charge (per unit) and sell this output is \$100 per bottle. 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 197 A cable TV company may have a monopoly in a certain geographic area. Are there any barriers to entry here? Because he is the only one who sells this particular good, his friend refers to him as a monopolist. Is Tony guaranteed profit because he is the only seller of a particular good? Not necessarily. It turns out that no one demands the good that Tony sells. In other words, a seller could possibly be a monopolist and not sell anything. The objective many sellers set for themselves is to be a monopolist with respect to a good for which demand is high. Barriers to Entry Suppose firm X is a monopolist. It is currently charging a relatively high price for its product and earning large profits. Why don’t other businesses enter the market and produce the same product as firm X? As noted earlier, one of the three characteristics of a monopolistic market is high barriers to entry. They include legal barriers, a monopolist’s extremely low average total costs, and a monopolist’s exclusive ownership of a scarce resource. Legal Barriers Legal barriers to entry in a monopoly market include public franchises, patents, and copyrights. A public franchise is a right granted to a firm by government that permits the firm to provide a particular good or service and excludes all others from doing so. Potential competition is thus eliminated by law. For example, as stated earlier, in many towns only one cable company is allowed to service a particular geographic area. This company has been given the exclusive right to produce and sell cable television. If an organization other than the designated company were to start producing and selling cable television, it would be breaking the law. Another example of a legal barrier is the restriction the U.S. government has placed on private mail carriers. Only the U.S. Postal Service can deliver first-class mail. Also, some towns make it illegal for more than one company to collect trash. In the United States, a patent is granted to the inventor of a product or process for 20 years. For example, a pharmaceutical com- pany may have a patent on a medicine. During this time, the patent holder is shielded from competitors; no one else can legally produce and sell the patented product or process. Copyrights give authors or originators of literary or artistic productions the right to publish, print, or sell their intellectual productions for a period of time. With books, either the author or the company that publishes the book holds the copyright. For example, the publishing company holds the copyright to this textbook—it owns the right to reproduce and sell copies of this book. Anyone else who copies the book or large sections of it to sell or simply to avoid buying a copy is breaking the law. Extremely Low Average Total Costs (Low Per-Unit Costs) Chapter 7 described average total cost as total cost divided by quantity of output, also called per-unit cost. For example, if total cost is \$1,000 and quantity of output is 1,000 units, then average total cost is \$1 per unit. In some industries, firms have an average total cost that is extremely low—so low that no other firm can compete with this firm. To see why, let’s consider the relationship of average total cost and price. A business will earn a per-unit profit when it sells its product for a price that is higher than its average total cost. For example, if price is public franchise A right granted to a firm by government that permits the firm to provide a particular good or service and excludes all others from doing so. Section 2 A Monopolistic Market 197 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 198 Will the Inter net Bring an End to Monopolies? ??? M any college campuses h...
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