Microeconomics: Chapter 10, monopoly, cartels

how is a monopoly different from a competitive market

price > MC (monopoly), Price=MC (competition)

• marginal value to society of extra units exceeds the marginal cost of producing the extra units

Demand curve is not perfectly elastic, demand = average revenue curve

• marginal revenue lies below the average revenue (demand)

what creates more output, monopoly or competitive market?

competitive market

monopoly’s profit maximizing decision (mc<p) to restrict output below the competitve level creates a loss of surplus (deadweight loss)

• MONOPOLY CREATES MARKET INEFFICIENCY

Cartel

association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition

• cartels have an incentive to cheat

what happens when all firms cheat (cartels)

the price falls back towards the competitive level

• joint profits are not maximized

• cartels must prevent entry of new users

how do monopolies maintain their profits ?

entry barriers

are monopolies price takers or pricemaker?

price maker