Sunday, October 26, 2008

Chapter 24

Chapter 24

Pure Monopoly – when a single firm is the sole producer of a product for which there are no close substitutes

Single Seller – When no other firms sell anything even similar

No close substitutes – a consumer who chooses not to buy the mopolists product must do without

Price maker – unlike a firm in competition which is a price taker, a monopolist sets it price

Blocked Entry – has no immediate competitors because of economic, legal or technological barriers preventing them from entering the industry

Nonprice competition – monopolists with standardized products (ie electricity) advertise with public relations while differentiated products (such as MS Windows) advertise their products attributes

Dual Objectives of the study of Monopoly

Barriers to Entry –

Economies of Scale – It is difficult for firms to break into the market when large, expensive technologies are needed

Natural Monopolies – when the market demand curve cuts the long run ATC curve where ATC ‘s are still decreasing

Legal Barriers to Entry – Patents and Licenses

Patent – aim to protect the inventor from people who wish to make money on the product without helping develop it, last for 20 years, the profits from one patentable item can lead to the R&D necessary to produce another

Licenses – Gov’t gives licenses to radio stations through the FCC etc

Ownership/Control of Essential resources - ie The International Nickel Company owned all the Nickel deposits

Pricing and other Strategic Barriers to entry – If another company tries to enter the market, the monopolist can respond by slashing prices

Monopoly Demand – Three Assumptions – Monopoly is secured, not licensed/regulated, single price monopoly

Unlike the competitive seller that faces a perfectly elastic demand, the monopolist faces a demand curve of the whole market

Marginal Revenue is less than Price – can only change the quantity demand by changing the price, MR <>

The Monopolist is a Price Maker – Firms with downward sloping demand curves are price makers

The Monopolist sets prices in the elastic Region of Demand – TR test for price elasticity states that if TR goes up when price goes down then the demand is elastic, a monopolist will never set prices such that price reductions would cause a TR decrease

Output and Price Determination

Cost Data – Assume it hires resources competitively and employs the same technology as a competitive firm would

MR = MC rule – If producing is preferable to shutting down then the monopoly will produce until MR = MC

To find the price that the monopoly would charge, see at what quantity MC and MR are equal and then find the price from the demand curve

No Monopoly supply curve

The pure monopolists MC curve is NOT its supply curve, the Monopolist has no supply curve

The monopolist equates marginal revenue and marginal cost to determine the best output


1 comment:

im_an_asian_lover said...

can u get the rest of chapter 24 notes?

btw, these are very helpful

i learn more from these than i do from my teacher