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Monopoly

Monopoly. Monopoly. Monopoly is a market in which a single firm serves the entire market. Patent: The exclusive right to sell a particular good for some period of time. Franchise or licensing scheme: A policy under which the government picks a single firm to sell a particular good.

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Monopoly

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  1. Monopoly

  2. Monopoly • Monopoly is a market in which a single firm serves the entire market. Patent: The exclusive right to sell a particular good for some period of time. Franchise or licensing scheme: A policy under which the government picks a single firm to sell a particular good.

  3. Total Revenue and Marginal Revenue

  4. Total Revenue and Marginal Revenue • As the firm cuts its price to sell more output, its total revenue rises for the first 4 units sold, but then decreases for the 5th and 6th units. Marginal revenue (the change in total revenue from selling one more unit) is positive for the first 4 units and then becomes negative.

  5. Demand Curve and Marginal Revenue Curve • Marginal revenue is equal to the price for the first unit sold, but is less than price for all other units sold. To increase the quantity sold, a firm cuts its price and receives less revenue on the units that could have been sold at the higher price.

  6. The Marginal Principleand the Output Decision Marginal PRINCIPLEIncrease the level of an activity if its marginal benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds its marginal benefit. If possible, pick the level at which the activity’s marginal benefit equals its marginal cost.

  7. Using the Marginal Principleto Pick a Price and Quantity

  8. Monopolist Picksa Quantity and a Price • To maximize profit, the monopolist picks point n, where marginal revenue equals marginal cost. The monopolist produces 900 doses per hour at a price of $15 (point m). The average cost is $8 (point c).

  9. Monopolist Picksa Quantity and a Price The marginal cost of the 600th dose is $4 as shown by point j on the marginal cost curve. The extra revenue associated with dose number 600 is shown by point i on the marginal revenue curve, the marginal revenue is $12.

  10. Monopoly Versus Perfect Competition • Monopoly • The monopolist picks the quantity at which long-run marginal cost equals marginal revenue (point n). • As shown by point m on the demand curve, the price associated with this quantity is $18 per dose.

  11. Monopoly Versus Perfect Competition • Perfect Competition • The long-run supply curve of a perfectly competitive, constant-cost industry intersects the demand curve at point p. • The equilibrium price is $8, and the equilibrium quantity is 400 doses per hour.

  12. Monopoly Versus Perfect Competition • Deadweight loss from monopoly: A measure of the inefficiency from monopoly; The deadweight loss is equal to the difference between the consumer-surplus loss from monopoly pricing and the monopoly profit.

  13. Deadweight Loss from Monopoly • A switch from perfect competition to monopoly increases the price from $8 to $18 and decreases the quantity sold from 400 to 200 doses.

  14. Deadweight Loss from Monopoly Consumer surplus decreases by an amount shown by the areas R and D, while profit increases by the amount shown by rectangle R. The net loss to society is shown by triangle D (the deadweight loss of monopoly.

  15. Rent Seeking: Using Resourcesto Get Monopoly Power • Rent Seeking: The process under which a firm spends money to persuade the government to erect barriers to entry and pick the firm as the monopolist.

  16. Natural Monopoly • A natural monopoly is a market in which the entry of a second firm would make price less than average cost, so a single firm serves the entire market.

  17. Natural Monopolist Uses the Marginal Principle to Pick a Price and Quantity The monopolist chooses point n (where marginal revenue equals marginal cost). The monopoly supplies 3 billion units at a price of $8.20 per unit (point m). The average cost is $6.20 per unit (point c). The profit per unit of electricity is $2.00.

  18. Why Won’t a Second FirmEnter the Market? • The entry of a second firm would shift the demand curve facing the typical firm to the left. After entry, the firm’s demand curve lies entirely below the long-run average cost curve.

  19. Price Controls for a Natural Monopoly • The average-cost pricing policy is a regulatory policy under which the government picks the point on the demand curve at which price equals average cost.

  20. Price Controls for a Natural Monopoly • Under an average cost pricing policy, the government chooses the price at which the demand curve intersects the average cost curve. Regulation shifts the long-run average cost curve, so the government picks point r, with a price of $6.00 per unit.

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