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Economics Chapter 14 Study Guide

Economics Chapter 14 Study Guide - Economics Chapter 14...

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Economics Chapter 14 Study Guide 1) Introduction a) In a monopoly a firm is the only one in its market and therefore, faces no competition from other firms supplying its product. b) The monopoly model is also useful in analyzing situations where firms agree to collude, or not compete, and act together as if they were a monopoly. 2) Is Any Firm Ever Really a Monopoly? a) Monopoly is the only seller of a good or service that does not have a close substitute. b) There are such things as monopolies just as long as the substitutes are not close substitute. i) The problem is it is hard to define what is considered a close substitute. c) One definition is: other firms must not be producing close substitutes if the monopolist can ignore other firms’ prices. i) Ex: Electrical light bulb vs. candles. They are considered substitutes but even if the price for candles drops very low people still need to buy light bulbs. d) Another definition (broader): i) A firm is a monopoly if no other firms sell a substitute that will cause the firm the loose economic profit and have to shut down in the long run. (1) Ex: Joe owns a pizza parlor. His parlor is the only pizza place in the entire area. Even though if Joe did raise his pizza prices people would eat at his competing firms (ie. Burger King) he is still considered a monopoly. e) Making the Connection (Is Xbox a close substitute for PlayStation 2?) i) To many gamers, PlayStation 2 is a close substitute for Xbox 3) Where do Monopolies Comes From? a) In order to have a monopoly the barriers to entry must be extremely high. b) Barriers to entry may be high enough to keep out competing firms for four main reasons: i) Entry Blocked by Government Action (1) Government grants patents or copyright to an individual or firm, which fives it the exclusive right to produce a product (a) Patent is the exclusive right to a product for a period of 20 years from the date the product was invented. (i) Ex: Microsoft has a patent on Windows so no other firms can sell versions of Windows. (b) Government grants patents to encourage firms to spend money on the research and development necessary to create new products. (c) Patents are very important to pharmaceutical firms (i) After the patents are up on certain drugs the sales fall drastically because now there is a lot of competition in the firm (d) Copyright is a government-granted exclusive right to produce and sell a creation. (i) U.S law grants the creator of a book film or piece of music the
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exclusive right to use the creation during the creator’s lifetime. (2) Governments grant a firm a public franchise, which makes it the exclusive legal provider of a good or service (a) Public franchise is a designation by the government that a firm is the only legal provider of a good or service.
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Economics Chapter 14 Study Guide - Economics Chapter 14...

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