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Pure Monopoly

Pure Monopoly. Principles of Microeconomics: Econ102. Where Do Monopolies Come From?. Monopoly: The only seller of a good or service that does not have a close substitute. Barriers to entry may be high enough to keep out competing firms for four main reasons: Government Action.

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Pure Monopoly

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  1. Pure Monopoly Principles of Microeconomics: Econ102

  2. Where Do Monopolies Come From? Monopoly: The only seller of a good or service that does not have a close substitute. • Barriers to entry may be high enough to keep out competing firms for four main reasons: • Government Action. • Control of key resources. • Vertical Integration. • Continual Innovation • Natural monopoly.

  3. Average Total Cost Curve for a Natural Monopoly A Natural Monopoly A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.

  4. How Does a Monopoly Choose Price & Output? A monopoly maximizes profit by producing where: MR = MC Price Maker: A situation in which the firm has the ability to set or control prices, thus exhibiting market power or, the ability to charge a price greater than marginal cost. If price makers raise their prices, they will lose some, but not all, of their customers. Therefore, they face a downward sloping demand curve. A monopoly’s demand curve is the same as the demand curve for the product.

  5. How Does a Monopoly Choose Price & Output A monopoly maximizes profit by producing where: MR = MC Remember that when a firm cuts the price of a product, one good thing and one bad thing happens: • The good thing: It sells more units of the product. • The bad thing: It receives less revenue from each unit than it would have received at the higher price.

  6. Finding Profit Maximizing Price and Output for a Monopolist Don’t Assume That Charging a Higher Price Is Always More Profitable For a Monopolist

  7. Calculating a Monopoly’s Revenue A Monopoly Maximizes Profit by Producing Where MR=MC

  8. Profit-Maximizing Price and Output for a Monopoly Profit Maximization For a Monopolist

  9. What Happens If a Perfectly Competitive Industry Becomes a Monopoly? Comparing Monopoly and Perfect Competition Conclusion: A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good.

  10. The Inefficiency of Monopoly Measuring the Efficiency Losses From Monopoly • We can summarize the effects of monopoly as follows: • Monopoly causes a reduction in consumer surplus. • Monopoly causes an increase in producer surplus. • Monopoly causes a deadweight loss, which represents a reduction in economic efficiency.

  11. Regulating A Natural Monopoly

  12. The Social Problems of Monopoly • In pure monopoly, because of the high barriers to entry, economic profits can be earned in the long-run as well. • At the expense of competition • Monopolies do not have as strong of an incentive to be efficient as there is no competitor who could drive them out of business. • No productive efficiency in the long-run • Except by coincidence, a monopoly company will produce at a higher cost per unit than would be found in a competitive company in the long-run. • Allocative Ineffficiency • Too little of the product is being produced from society’s point of view

  13. Government Policy Toward Monopoly Antitrust Laws and Antitrust Enforcement Antitrust laws: Government policies / laws that deal with monopolies and collusion. Should promote competition among firms. Collusion: An agreement among firms to charge the same price, or to otherwise not compete.

  14. Important U.S. Antitrust Laws Government Policy Toward Monopoly Antitrust Laws and Antitrust Enforcement

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