Monopolies ECON 22060-002
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This 2 page Class Notes was uploaded by Amy Turk on Friday May 20, 2016. The Class Notes belongs to ECON 22060-002 at Kent State University taught by Dr. Ludmila Leontieva in Spring 2016. Since its upload, it has received 6 views. For similar materials see Microeconomics in Economcs at Kent State University.
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Date Created: 05/20/16
MONOPOLIES ● if a single firm controls an input essential to the production of a given product, then the firm will have market power ● price setter = a firm with at least some latitude to set its price ● a profit maximizing monopolist will choose the level of output so that marginal revenue equals price ● the primary distinction between the profit-maximizing decision to rule for a monopolist and a perfectly competitive firm is in the calculation of marginal revenue ● when start up costs are high relative to marginal cost, the production process is likely to exhibit increasing returns to scale ● patents = the right to sell products for a specified period of time ● natural monopoly = arises from increasing returns to scale ● if firms in a monopolistically competitive industry are earning a positive economic profit then in the long run, entry into the market will drive economic profit to zero ● if a firm doubles all of its inputs and output exactly doubles, then the production process exhibits constant returns to scale ● most important strategic decision facing monopolistically competitive firms = how to differentiate their products from those of their rivals ● perfectly competitive firms face perfectly elastic demand curves ○ imperfectly competitive firms face downward-sloping curves ● MR = MC (profit-maximizing rule) ● in the long run, monopolistically competitive firms are expected to earn zero economic profit ● demand curve formula: P = a-bQ ● marginal revenue curve formula: P = a-2bQ ● marginal revenue = the change in a firm’s revenue that results from a one-unit change in the firm’s output ● give rise to market power: ○ gov’t licenses or franchises ○ economies of scale ○ patents and copyrights ○ network economies ● a firm that has market power ○ can raise the price of its good w/o losing all the sales ○ faces a downward-sloping demand curve ● price setter = a firm with at least some latitude to set its own price ● pure monopoly = only one supplier of a unique product w/ no close substitutes ● oligopoly = small number of firms produce products that are either close or perfect substitutes ● for a monopolist and a perfectly competitive firm, the calculation of marginal cost is the same ● monopolistically competitive market = large number of firms produce slightly different products that are close substitutes for one another ● if a firm has market power, it faces a downward sloping demand curve
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