Monopoly Chapter 15
Monopoly Chapter 15
Monopoly y While a competitive firm is a price taker, a monopoly firm is a price maker o a firm is considered a monopoly if it is the sole seller of its product its product does not have close substitutes
Monopoly • While a competitive firm is a price taker, a monopoly firm is a price maker. • A firm is considered a monopoly if . . . – it is the sole seller of its product. – its product does not have close substitutes
Why Monopoly Arise o The fundamental cause of monopoly is barriers to entry. o Barriers to entry have three sources Ownership of a key resource The government gives a single firm the exclusive right to produce some good Costs of production make a single producer more efficient than a large number of producers
Why Monopoly Arise • The fundamental cause of monopoly is barriers to entry. • Barriers to entry have three sources: – Ownership of a key resource. – The government gives a single firm the exclusive right to produce some good. – Costs of production make a single producer more efficient than a large number of producers
Monopoly resources Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason
Monopoly Resources • Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason
Government-Created monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets o Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest
Government-Created Monopolies • Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. • Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest
Natural Monopoly e an industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms A natural monopoly arises when there are economies of scale over the relevant range of output
Natural Monopoly • An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. • A natural monopoly arises when there are economies of scale over the relevant range of output
Economies of scale as a cause o of monopoly. Cost Average total cost 0 Quantity of Output
Average total cost Quantity of Output Cost 0 Economies of Scale as a Cause of Monopoly
Monopoly versus competition Monopoly Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales ° Competitive firm Is one of many producers Has a horizontal demand curve Is a price taker ells as much or as little at same price
Monopoly versus Competition • Monopoly – Is the sole producer – Has a downward-sloping demand curve – Is a price maker – Reduces price to increase sales • Competitive Firm – Is one of many producers – Has a horizontal demand curve – Is a price taker – Sells as much or as little at same price
Demand curves for Competitive and monopoly firms (a)A Competitive Firms (b)A Monopolists Demand curve Demand curve Price Price Demand Demand Quantity 0 Quantity of Output Output
Demand Quantity of Output (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve 0 Price 0 Quantity of Output Price Demand Demand Curves for Competitive and Monopoly Firms
A Monopoly's Revenue ● Total revenue >PXQ=TR o Average revenue >TR/Q=AR=P ● Marginal revenue △TR/△Q=MR
A Monopoly’s Revenue • Total Revenue ➢P x Q = TR • Average Revenue ➢TR/Q = AR = P • Marginal Revenue ➢DTR/DQ = MR