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Chapter 12 Notes

by: Danyn Notetaker

Chapter 12 Notes ECON 1010

Marketplace > Tulane University > Economcs > ECON 1010 > Chapter 12 Notes
Danyn Notetaker
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Notes cover ppt and lecture
Armine Shahoyan
Class Notes




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This 4 page Class Notes was uploaded by Danyn Notetaker on Sunday April 17, 2016. The Class Notes belongs to ECON 1010 at Tulane University taught by Armine Shahoyan in Summer 2015. Since its upload, it has received 13 views. For similar materials see Microeconomics in Economcs at Tulane University.


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Date Created: 04/17/16
Pure Monopoly - Definition: When a single form is the sole producer of a product for which there are mo close substitutes - There are a number of products where producers have a substantial amount of monopoly power and are called ‘near’ monopoly - There are several characteristics that distinguish pure monopoly • There is a single seller so the firm and industry are synonymous • There are no close substitutes for the firms products • Firm is a ‘price maker’ • Entry into the industry by other firms is blocked • A monopolist may/may not engage in non-price competition - Example of pure and ‘near’ monopolies • Public Utilities — gas, electric, water, TV, and local phone — pure monopolies • Central Microcprossors (Intel), First Data Resources are ‘near’ monopolies • Manufacturing monopolies are virtually nonexistent in the U.S. Professional Sports grant cities team monopolies • • Monopolies may only be geographic - Analysis of monopolies of monopolies yields insight concerning monopolistic competition and oligopoly Barriers to Entry Limiting Competition - Economies of scale constitute one major barrier • Occurs where lowest unit costs and unit prices depend on existence of a small number of large firms or monopoly • Public utilities are often Natural monopolies because they have economies of scale in the extreme case where one firm is most efficient in satisfying demand Government usually gives one firm the right to operate a public utility in exchange for • government regulation power • Explanation of why more than one firm would be inefficient, and involves the description of a maze of pipes and wires - Legal Barriers to entry a monopolistic industry also exist in the form of patents • Licenses are another - Ownership or control of essential resources is also a barrier - Monopolists may use price/other barriers such as selective price cutting and advertisements Monopoly Demand - Monopoly Demand is the industry demand and is therefor downward sloping - Our analysis of monopoly demand makes three assumptions 1. Monopoly is secured by patents, economies of scale, or resource ownership 2. Firm is not regulated by any unit of government 3. Firm is a single-price monopoly; it changes the same price for all unites of output - Price will exceed MR because the monopolies must lower price to sell additional units - The monopolist is a price maker • The form controls output and price but is not free of market forces, since the combination of output that can be sold depends on demand - Price elasticity also plays a role in monopoly price setting • As long as price is elastic, Total Revenue will rise when monopoly lowers price, not true when demand becomes inelastic • At this point Total revenue falls as output expands, and since total cost will rise with output, profits will decline - Marginal Revenue of the product is less than the price of product for monopolies because we have to cut price of the previous unit Output and Price Discrimination - Cost data is based on hiring resources in competitive markets - The MR=MC rule will tell the monopolies where to find its profit-maximization output level - The pure monopolist has no supply curve because there is no unique relationship between price and quantity supplied - There are several misconceptions about monopoly prices • Monopolist cannot charge the highest price it can get, because t will maximize profits where TR-TC is the greatest • Total,not unit, profits is the goal of the monopolist • Unlike the purely competitive firm, the pure monopolist ca continue to receive economic profits in the long run Economic Effects of a Monopoly - Price, output, and efficiency of resource allocation should be considered Monopolies will sell a smaller output and charge a higher price than would competitive • producers welling in the same market • Monopoly price will exceed marginal cost, because it exceeds MR and the monopolist produces MR-MC • Allocative efficiency is not achieved because price (what the product is worth to consumers) is above MC (opportunity cost of product). Ideally, output should expand to a level where price = MR=MC, but this will occur only under pure competitive conditions where price=MR • Productive efficiency is not achieved because the monopolist’s output is less than the output at which Average total cost is at its minimum The efficiency (or deadweight) loss is also reflected in the sum of consumer and producer • surplus equaling is less than maximum possible value - Income distribution is more unequal than it would be under a more competitive situations. The effect of the monopoly power is to transfer income from consumers to business owners • This will result in a redistribution of income in favor of higher-income business owners, unless the buyers of monopoly products are wealthier than the monopoly owners - Cost complications may lead to other conclusions • Economies of scale may result in one or two firms operating in an industry experiencing lower ATC than many competitive firms • X-inefficiency may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs • Rent-seeking behavior often occurs as monopolies seek to acquire/maintain government- granted monopoly privilege - Technology progress and dynamic efficiency may occur in some monopolistic industries but not in others • Some monopolies have shown little interest in technology progress • On the other hand, research can lead to lower unit costs, which help monopolies as much as any other type of firms - Assessment and policy options: • Although there are legitimate concerns of the effects of monopoly power on the economy, monopoly power is not wide spread • When monopoly power is resulting in an adverse effect upon the economy, the government may choose to intervene on a case-by-base basis Price Discrimination - Price discrimination occurs when a given product is sold at more than one price and the price differences aren’t based on cost differences - Price discrimination can take three different forms 1. Charging each customer on a single market the maximum price the are willing and able to pay 2. Charging each customer one price for the first set of unites, and lowering the price for additional units 3. Charging one group of customers one price, and another group a different price - Conditions needed for successful price discrimination • Monopoly power is need with the ability to control output and price • The firm must have the ability to serrate then market, to divide buyers into separate classes that have a different willingness/ability to pat for the product • Buyers must be unable to resell the original product/service - Examples of price discrimination: Airline change higher fares to executive travelers (inelastic) than vacation travelers (elastic) • • Elective utilities frequently segment their markets by users, such as lighting and heating • Long-distance phone secrete has higher rates during the day when businesses make their phone calls (inelastic) and lower prices during nights and weekends, when less important calls take place • Movie theaters and golf courses vary their prices on the basis of time and age • Discount companies allow firms to offer a discount to price-sensitive customers • International trade is an example of firms willing at different prices in different countries - Graphical analysis • Most price discrimination separates the market into 2(+) groups of customers Because the demand curves for software for students and small companies differ, so will • their MR curves and profit-maximizing and quantity for each group • For each segment of the market the monopolists will set output and price according to the MR=MC rule • Firms realize greater profits and lower losses - Price discrimination is common and only illegal when the firm is using it to less/eliminate competition Regulated Monopoly - Occurs where a natural monopoly/economies of scale make one firm desirable - As a result of changes in technology and deregulation in the local telephone and electricity- provider industry, some states are allowing new entrants to compete in previous regulated markets - In those markets that are still regulated, a regulatory commission may attempt to establish the legal price for the monopolist that is equal to MC at the quantity of output chosen, socially optimal price - However, setting a price=MC may cause losses, because public utilities must invest in enough plants to handle peak loads • Relators often choose a price = AC rather than MC, so that the monopoly from can achieve ‘fair return’ and avoid losses - Normal profit means economic profits are zero - Output produced is less than the output at the social optimal price, but is greater than the output pf an unregulated monopoly - The dilemma for regulators is there to choose a socially optimal price, where P=MC, or a fair- return price where, P=AC Monopoly Power in the Internet Age - In the early 1990s it was thought that the internet would foster pure competition buy creating a level playing field for all types of media, communications, and commerce - This prediction turns out to be wrong • Finding the information you want is a huge problem - Advertisers and users both have an incentive to stick with the search engine, social media, or online retailer that has the most users


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