Chapter 16: Monopoly

optimal quantity is found at…

MR = MC

does P = MR?

no. P > MR for a monopoly. since monopolies can influence prices

are products differentiated in a monopoly?

yes

monopolist

a firm that’s the only producer of a good w/ no close substitutes

monopoly

an industry controlled by a monopolist

market power

the ability of a firm to raise prices

what does a monopolist do to the supply & demand curve?

decreases quantity supplied to Q_M, thus raising price to P_M

reduces output & raises price

an industry that’s monopolized leads to a…

deadweight loss

for a monopoly, profit will not persist in the long run unless there is…

a barrier to entry

what do barriers to entry do for monopolists?

generate profit for them in the short & long run

are barriers to entries essential for monopolies?

yes

examples of barriers to entry

control of natural resources/inputs

increasing returns to scale

technological superiority

network externalities

govt.-made barriers (ex. patents & copyrights)

control of a scare resource of input (barrier to entry)

if a key input is controlled by one company

natural monopolies

increasing returns to scale

concentrate production w/ one firm

increasing returns to scale definition

when the output increases by a larger proportion than the increase in inputs during the production process

increasing returns to scale (barrier to entry)

a natural monopoly exists when increasing returns to scale (economies of scale) provide a large cost advantage to a single firm

a given quantity of output is produced more cheaply by one large firm than by two or more smaller firms

for a natural monopoly, ATC is…

falling over the relevant output range

technological superiority (barrier to entry)

a firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist

network externality (barrier to entry)

the value of a good or service to an individual increasing as more others use the same good or service (ex. twt, insta)

patent (govt.-created barrier to entry)

gives an inventor a temporary monopoly in the use or sale of an invention

copyright (govt.-created barrier to entry)

gives he creator of a literary or artistic work sole rights to profit from that work

why are govt.-created barriers to entry important?

ppl wouldn’t produce if someone would just freelance off their work

where is profit maximized for a monopolist?

the Q where MR = MC

where is MR found on the production function?

below the demand curve

what are the 2 opposing effects an increase in production by a monopolist has?

a quantity effect & a price effect

quantity effect

one more unit is sold, increasing total revenue by the price at which the unit is sold

price effect

to sell the last unit, the monopolist must cut the market price on all units sold. decreases total revenue

what do the price effect & quantity effect do to total revenue?

price effect: dec. TR

quantity effect: inc. TR

non price discriminating monopolist

doesn’t charge diff. prices for diff. customers

when TR is increasing, is quantity effect or price effect dominating?

quantity effect

when TR is falling, is quantity effect or price effect dominating?

price effect

what are the steps of profit maximization for a monopoly?

1. choose a quantity (where MR = MC)

2. choose a price (highest price consumer will pay for that quantity, on demand curve)

for profit maximization for a monopoly, can you choose the price first?

no. always choose quantity first.

maknae eats first

how do you find the AC at the profit-maximizing point?

look @ ATC curve

how do you find the profit of a monopoly on a production function?

at the optimal point, area of rectangle above MC & below demand curve

is there a monopoly supply curve?

no. monopolies don’t have supply curves since there’s no set relationship btwn price & quantity supplied

is there deadweight loss in perfect competition? how abt in a monopoly?

not in perfect competition.

yes, in monopoly

how does a monopoly cause deadweight loss?

when they raise prices & lower Q; consumer surplus falls & deadweight loss is created.

how can deadweight loss be avoided?

govt. policy

antitrust policy

the govt. policies used to prevent or eliminate monopolies

natural monopolies bring lower costs, but…

there’s no guarantee the firm will voluntarily pass along its cost savings to customers

how can public policy deal with natural monopolies? 2 ways

public (govt.) ownership

price regulation

what is the issue with public (govt.) ownership (dealing w/ natural monopoly)?

publicly owned companies are often poorly run

price regulation (natural monopoly)

a price ceiling imposed on a monopolist doesn’t create shortages if it’s not set too low

monopoly outcomes generate a deadweight loss because…

some potentially beneficial transactions do not occur

consumer surplus (CS) for monopoly

area above the monopoly price & below the demand curve

in a monopoly, produce at the highest quantity where…

MR is just above MC

a perfectly price-discriminating monopolist expands output until

P = MC