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Monopoly

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Eco 2023 Chapter 10 Fall 2007 Monopoly A market with a single seller with a product that is differentiated from other products. Characteristics Single seller Firm and ... – PowerPoint PPT presentation

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Title: Monopoly


1
Monopoly
  • Eco 2023
  • Chapter 10
  • Fall 2007

2
Monopoly
  • A market with a single seller with a product that
    is differentiated from other products.

3
Characteristics
  • Single seller
  • Firm and industry are synonymous
  • No close substitutes
  • Price maker
  • Blocked entry
  • Barriers to entry keep competitors out of the
    market
  • Standardized or differentiated

4
Barriers to Entry
  • Any impediment that prevents new firms from
    entering an industry and competing on an equal
    basis with existing firms
  • Types
  • Economies of scale
  • Legal restrictions
  • Control over essential resource

5
Economies of Scale
  • Declining average total cost with added firm size
    are extensive
  • Long run average total cost will decline over a
    wide range of output
  • Only a single large firm can achieve low average
    total costs
  • Protects the firm from competitors
  • Natural monopoly
  • the market demand curve cuts the long-run ATC
    curve where average total costs are still
    declining

6
Legal Restrictions
  • Patent
  • A legal barriers to entry that grants its holder
    the exclusive right to sell a product for 20
    years from the date the patent application is
    filed
  • Innovation
  • The process of turning an invention into a
    marketable product
  • Licenses
  • Governments often confer monopoly status by
    awarding a single firm the exclusive right to
    supply a particular good or service

7
Control over Essential Resource
  • Firms owns all sources of a resource
  • ALCOA aluminum
  • DeBeers diamonds

8
Monopoly Demand
  • Three assumptions
  • Patents, economies of scale or resource ownership
    secure our monopolists status
  • No unit of government regulates the firm
  • Single price monopolist,
  • Demand curve
  • Downward sloping demand curve
  • Quantity demanded increases as price decreases

9
Implications
  • Marginal revenue is less than price
  • The downward sloping demand curve means that it
    can increase sales by charging a lower price
  • Marginal revenue is less than price for every
    level of output
  • Marginal revenue curve is below the demand curve
  • Marginal revenue is positive while total revenue
    is increasing.
  • When total revenue is decreasing, marginal
    revenue is negative

10
Monopoly
Marginal Revee
11
Monopoly
  • Where demand is price elastic, marginal revenue
    is positive
  • Therefore
  • TR increases as Price decreases
  • Where demand is price inelastic, marginal revenue
    is negative
  • TR decreases as Price increases
  • Where demand is unit elastic, marginal revenue is
    zero,
  • TR is at a maximum, neither increasing nor
    decreasing

12
Implications
  • Price Maker
  • When monopolist decides on output level, he
    determines price.
  • Elastic Region
  • Monopolist will never choose a price-quantity
    combination where price reductions cause total
    revenue to decrease
  • Marginal revenue is NEGATIVE

13
Example
14
Monopoly
  • Profit Maximization
  • A firm that must find the profit maximizing price
    when the demand curve for its output slopes
    downward
  • Monopolist produces the quantity at which total
    revenue gt total cost by greatest amount
  • Marginal revenue Marginal cost

15
Monopoly short run
Marginal Revenue
Q
16
Monopoly
  • Short run
  • Economic profits can exist
  • Losses
  • Can exist
  • If the price covers average variable cost, the
    firm will produce
  • If not, the firm will shut down at least in the
    short run

17
Long run Profit Maximization
  • Long run efficiency in pure competition is
  • P MC Minimum ATC
  • Monopoly
  • MR lt P, monopolist will sell smaller output at a
    higher price than pure competition
  • An efficiency loss occurs because
  • P gt MC
  • P gt minimum ATC

18
Long-Run Profit Maximization
  • If a monopoly is insulated from competition by
    high barriers that block new entry, economic
    profit can persist in the long run.

19
Monopoly
  • Allocation of Resources
  • If monopolists are no greedier than perfect
    competitors because both maximize profit
  • What is the problem with monopoly?
  • Lower output
  • Higher price
  • Than perfect competition

20
Monopoly
  • Price Discrimination
  • Increasing profits by charging different groups
    of consumers different prices when the price
    differences are not justified by differences in
    production costs

21
Monopoly
  • Conditions
  • Demand must be downward sloping
  • At least to separate groups of consumers
  • Each with different price elasticity of demand
  • Firm must be able to charge each group a
    different price for essentially the same product
  • The firmmust be able to prevent those who pay the
    lower price from reselling the product to those
    who pay the higher price
  • Each market, the firms equates marginal revenue
    with marginal cost
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