Micro chapter 13

Chapter 13: Monopoly

1. Principles of Economics

• Focuses on the economics of monopolies and their effects on market dynamics.

2. Imperfect Competition and Market Power

• Imperfectly Competitive Industry:

  • An industry where individual firms can influence the price of their output.

• Market Power:

  • The ability of imperfectly competitive firms to raise prices without losing all demand.

3. Forms of Imperfect Competition

3.1 Monopoly

• An industry with a single firm; entry of new firms is blocked.

3.2 Oligopoly

• An industry with a few large firms, each capable of affecting prices.

3.3 Monopolistic Competition

• Firms differentiate their products within many producers and free entry.

4. Pure Monopoly

• Definition: An industry where a single firm produces a product with no close substitutes and faces significant barriers to entry.

5. Price and Output Decisions in Monopoly Markets

• A monopolist's demand is the entire market demand.

• The monopolist decides the market price by balancing profit from higher prices against the quantity sold.

6. Marginal Revenue Facing a Monopolist

• At quantities other than 1 unit, a monopolist's marginal revenue is lower than the price due to the necessity of reducing price to sell additional units.

• Table 13.1 Summary: Shows the relationship between quantity produced, price, total revenue, and marginal revenue; highlights that MR decreases as quantity increases.

7. Price and Output Choice for a Profit-Maximizing Monopolist

• A monopolist maximizes profit by increasing output until marginal revenue equals marginal cost (MC).

• Maximum profit identified at 5 units at a price of $6.

8. Demand in Monopoly Markets

• A monopolist lacks a supply curve independent of demand; both price and quantity depend on marginal cost and demand.

9. Comparison with Perfect Competition

9.1 Long-Run Equilibrium

• Under perfect competition, price equals long-run average cost due to constant returns to scale.

9.2 Monopoly vs Perfectly Competitive Outcomes

• Monopoly outputs are lower, and prices are higher compared to perfectly competitive outcomes.

• Key Comparisons:

  • Monopoly Price (Pm): $4, Quantity (Qm): 2,500.

  • Perfect Competition Price (Pc): $3, Quantity (Qc): 4,000.

10. Barriers to Entry in Monopoly

10.1 Factors Preventing Competition

• Economies of Scale: Large firms can produce efficiently at lower average costs.

• Natural Monopoly: An industry where a single firm is most efficient at production due to significant economies of scale.

10.2 Patents and Government Rules

• Patents grant exclusive rights to inventors, restricting competition.

• Government regulations can create barriers for new entrants.

10.3 Ownership of Scarce Resources

• A firm controlling a crucial input may dominate the market.

10.4 Network Effects

• The value of a product increases with the number of users, leading to monopolistic advantages.

11. Social Costs of Monopoly

• Deadweight Loss: Represents the social costs from monopolistic pricing strategies that distort consumer behavior.

12. Welfare Loss from Monopoly

• Analysis of the demand curve indicates potential consumer benefits from increasing output.

• Areas of welfare loss are illustrated by movements from higher output.

13. Discussion on Imperfect Markets

• Firms with market power affect pricing and resources allocation.

• Insights from the study of pure monopolies inform understanding of monopolistic competition and oligopoly which will be explored further in subsequent chapters.