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Topic 10

by: John Om

Topic 10 ECON 102

John Om
Penn State
GPA 3.0

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About this Document

notes cover from topic 10
Introductory Microeconomic Analysis and Policy
Wayne Geerling
75 ?




Popular in Introductory Microeconomic Analysis and Policy

Popular in Economcs

This 5 page Bundle was uploaded by John Om on Tuesday April 19, 2016. The Bundle belongs to ECON 102 at Pennsylvania State University taught by Wayne Geerling in Winter 2016. Since its upload, it has received 8 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.


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Date Created: 04/19/16
Topic 10: Monopoly Defining Monopoly ­ Monopoly o Single seller who produce a good (NCAA) ­ Three main characteristics: o Many buyers, one seller o Heterogeneous good o Very high barriers to entry and exit Barriers to Entry ­ Two different types of barriers to entry for monopolists: o Natural barriers o Government – created barriers Natural Barriers to Entry ­ Controls of resources o Standard oil control 90% of all oil o De beers – owns 70% of the world’s diamonds o One supplier derives price so high because nobody else has a competing price ­ Natural monopoly: o A monopoly exists because a single large firm has lower costs than any potential  competitor o Makes it hard for other firms to enter o Caused by high fixed costs & a low marginal cost Government Created Barriers ­ Licenses, Qualifications o NYC Cab license o Qualified practitioners (need monopolies to control monopoly)  ­ Patents and Copyright Law o Patents & copyright laws create legal democracy monopolies “protect intellectual  property” Monopolist’s Pricing & Output Decisions ­ Perfectly competitive firms o Price takers, cannot affect the price o Each of the firm faces a horizontal demand (P=MR ­ Monopoly firms o Price makers, sets the price by choosing output level o Faces the downward sloping demand curve for the entire industry Profit Maximizing Rule for Monopoly ­ Similarity between monopoly & competitive firms o Profit is maximized at output level (Q) where MR = MC ­ Difference between monopoly & competitive firms o In competition, P = MR o In monopoly, P > MR o To increase output, monopoly must lower the price****** o Competitive firms can sell as much as they want at the market price Monopoly Marginal Revenue Quantity of customers Price (P) Total Revenue (TR) = Marginal Revenue per (Q) Q x P 1,000 customers(MR) = ∆TR 0 $100 0 1,000 $90 90,000 90,000 2,000 $80 160,000 70,000 3,000 $70 210,000 50,000 4,000 $60 240,000 30,000 5,000 $50 250,000 10,000 6,000 $40 240,000 ­10,000 7,000 $30 210,000 ­30,000 8,000 $20 160,000 ­50,000 9,000 $10 90,000 ­70,000 10,000 $0 0 ­90,000 Monopoly Marginal Revenue ­ When the monopoly decreased its price in order to sell more output units, two things happen: o The price effect: all units now sold at a lower price (loss for the firm) o The output effect: more units sold (gain for the firm) Deciding How Much to Produce ­ 3­step process: o 1. Find the profit maximizing point: MR = MC o 2. Find output (Q) at this point o 3. Determine the average cost of producing Q units Contrasting Competition and Monopoly Competitive Markets Monopoly Many firms One firm Produces efficient levels of output (since P = MCProduces less than the efficient level of output  (since P > MC) Cannot earn long­run economic profits May earn long­run economic profits Has NO market power (is a price taker) Has significant market power (is a price maker) Monopoly vs. Competition ­ Output (quantity) o Q MonopolyCompetition ­ Price o PMonopoly Competition ­ Deadweight Loss o Monopoly DWL > 0 o Competition DWL = 0 Monopoly Problems ­ Few choices o Restricts consumer ability to put downward pressure on prices. No substitutes ­ Rent Seeking o Competition among rivals to secure monopoly profits o This type of competition produces one winner o Inefficient: resources used to monopolize rather than become a more competitive firm Solutions to Monopoly ­ 1. Break up the monopoly ­ 2. Reduce barriers to entry ­ 3. Regulate the market


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