MicroEconomics - Lecture 7

MicroEconomics - Lecture 7 - Monopoly 1. To Be A Monopolist...

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1. To Be A Monopolist While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if: It is the sole seller of its product. Its product does not have close substitutes. 2. Why Monopolies Arise The fundamental cause of monopoly is barriers to entry. Barriers to entry have three sources: 1. Ownership of a key resources. Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason. 2. The government gives a single firm the exclusive right to produce some good. Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest. 3. Costs of production make a single producer more efficient than a large number of producers. An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. A natural monopoly arises when there are economies of scale over the relevant range of output. The average total cost is down-sloping. 3. Monopoly versus Competition Monopoly Is the sole producer. Faces a downward-sloping demand curve. Is a price maker. Reduces price to increase sales. Competitive Firm Is one of many producers. Faces a horizontal demand curve. Is a price taker.
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MicroEconomics - Lecture 7 - Monopoly 1. To Be A Monopolist...

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