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by: TiNesha Sampson

Chapter7Notes.pdf ECON 224 006

TiNesha Sampson
GPA 3.7
Introduction to Economics

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These are notes for Chapter 7
Introduction to Economics
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This 3 page Class Notes was uploaded by TiNesha Sampson on Sunday October 18, 2015. The Class Notes belongs to ECON 224 006 at University of South Carolina taught by Slice in Summer 2015. Since its upload, it has received 42 views.


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Date Created: 10/18/15
Chapter 7 Notes Monopoly 0 Has market power the ability to alter the price of a good or service 0 One firm that produces the entire market supply of a particular good or service 0 The firm s demand curve is identical to the market demand cure for the product 0 Market demand total quantity of a good or service people are willing and able to buy at alternative prices in a given time period Price vs Marginal Revenue 0 Marginal revenue MR change in total revenue that results from a one unit increase in quantity sold 0 Price P equals marginal revenue only for perfectly competitive firms 0 Marginal revenue is always less than price for a monopolist o A monopolist can sell additional output only if it reduces prices 0 The MR curve lies below the demand curve at every point but the first Profit Maximization 0 Used to determine rate of output 0 Maximizes profit where MRMargina Cost MC 0 Applies to all firms 0 Perfectly competitive MCMR which P o Monopolist MCMR which is ltP The Production Decision Choosing a rate of output for a firm The selection of the shortterm rate of output s found where the MR and MC curves intersect o Establishes the profitmaximizing rate of output Demand curve tells us the highest price consumers are willing to pay for that specific quantity of output Monopoly Profits 0 Total profit profit per unit PPU x of units produced q o PPU P Average total cost ATC 0 Total profit PATC x q 0 Total profit can also be calculated by subtracting total cost TC from total revenue TR 0 Total profit TRTC Monopoly vs Competitive Outcomes o A monopolist produces less and charges a higher price than would a competitive industry 0 Less efficient than perfect competition Barriers to Entry 0 Obstacles that make it difficult or impossible for wouldbe producers to enter a particular market 0 Patent Protection 0 A government grant of exclusive ownership of an innovation 0 Legal Harassment o Suing potential new entrants can deter entry into an industry 0 Lengthy legal battles are so expensive that the threat of legal action may deter entry into a monopolized market 0 Exclusive Licensing 0 Lack of a license makes it difficult for potential competitors to acquire the factors of production they need 0 Bundled Products 0 Forcing consumers to purchase complementary products thwarts competition 0 Makes it difficult for competitors to sell their products profitably 0 Government Franchises o A monopoly granted by a government license I Power telephone and cable TV companies I US Postal Service Competition vs Monopoly o In both high prices and profits signal consumers demand for more output o In competition high prices attract new suppliers o In monopoly barriers to entry are erected to exclude potential competition 0 Production and supplies o In competition expand and prices slide down the market demand curve o In monopoly are constrained and prices don t move down the market demand curve 0 Equilibrium o In competition new equilibrium is established average costs of production approach their minimum o In monopoly no ne equilibrium average costs are not necessarily at or near a minimum 0 Economic profits o In competition approach zero and price equals marginal cost throughout the process o In monopoly at a maximum price exceeds marginal cost at all times 0 Profit squeeze o In competition the profit squeeze pressures firms to reduce costs or improve product quality o In monopoly there is no profit squeeze to pressure the firm to reduce costs or improve product quality Near Monopolies 0 Two or more firms may rig the market to replicate monopoly outcomes and profits 0 Duopoly two firms together produce the industry output o Oligopoly several firms dominate the market 0 Monopolistic competition many firms each have a monopoly on their own brand image but must still contend with the competing brands Redeeming qualities of Monopolies 0 Research and Development 0 Have a greater ability to pursue research and development 0 EntrepreneurialIncentives o Promise of greater profits is a strong incentive to innovate o Economies of Scale 0 Are present if average costs fall as the size of plant and equipment increases 0 A large firm can produce goods at lower unit of cost than a small firm can 0 Natural Monopolies 0 An industry in which one firm can achieve economies of scale over the entire range of market supply 0 Contestable Markets 0 An imperfectly competitive industry subject to potential entry if prices or profits increase 0 Structure versus Behavior o If potential rivals force a monopolist to behave like a competitive firm then monopoly imposes no cost on consumers or on society at large Entry to a monopoly 0 Entry effects 0 Predatory pricing temporary price reductions designed to drive out competition


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