monopolies

Monopoly

A business that produces or sells a good or service for which no close substitute exists.

Natural Monopoly

A type of monopoly that arises due to economies of scale, allowing one firm to supply the entire market at a lower cost than multiple firms.

Barriers to Entry

Legal constraints that protect a firm from potential competition.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit of a product.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Deadweight Loss

The economic surplus lost due to producing fewer quantities than a perfectly competitive market and selling at a higher price.

Lerner Index of Monopoly Power

A measure of monopoly power calculated as L = (P - MC) / P.

Average Cost Pricing

A regulatory approach where the government sets the price of a monopoly equal to its average total cost.

Profit-Maximizing Condition

In a monopoly, the profit-maximizing quantity is determined where marginal revenue (MR) equals marginal cost (MC).

Social Loss

The loss incurred in a monopoly market due to inefficiencies and lower output compared to a competitive market.

Efficiency of Monopoly

Monopolies often lead to allocative and productive inefficiencies, resulting in higher prices and lower output compared to competitive markets.

Sources of Monopoly Power

Sources of Monopoly Power: Factors affecting the monopoly power of the firms are:

• The Price Elasticity of Demand:  The more inelastic is demand, the more monopoly power the firm can have.

• The Number of Firms in the Market:  The monopoly power of each firm will fall as more firms enter the market.

• Interaction Among the Firms:  The more aggressive the firms are in competing with each other, the less monopoly power they will have.