Monopoly
10/23/2012
CHAPTER
15
Monopoly
In this chapter, look for the answers to these questions:
Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society’s well-being? What can the government do about monopolies? What is price discrimination?
Economics
PRINCIPLES OF
N. Gregory Mankiw
Premium PowerPoint Slides by Ron Cronovich
© 2009 South-Western, a part of Cengage Learning, all rights reserved
1
Introduction
A monopoly is a firm that is the sole seller of a product without close substitutes.
Why Monopolies Arise
The main cause of monopolies is barriers to entry – other firms cannot enter the market. Three sources of barriers to entry: 1. A single firm owns a key resource. E.g., DeBeers owns most of the world’s diamond mines 2. The govt gives a single firm the exclusive right to produce the good. E.g., patents, copyright laws
2
In this chapter, we study monopoly and contrast it with perfect competition.
The key difference:
A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power.
MONOPOLY
MONOPOLY
3
Why Monopolies Arise
3. Natural monopoly: a single firm can produce the entire market Q at lower cost than could several firms.
Example: 1000 homes need electricity ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes.
MONOPOLY
Monopoly vs. Competition: Demand Curves
In a competitive market, the market demand curve slopes downward. But the demand curve for any individual firm’s product is horizontal at the market price. The firm can increase Q without lowering P, so MR = P for the competitive firm.
4
Cost
Electricity
ATC slopes downward due to huge FC and small MC ATC 500 1000 Q
P
A competitive firm’s demand curve
$80 $50
D
Q
5
MONOPOLY
1
10/23/2012
Monopoly vs.
CHAPTER
15
Monopoly
In this chapter, look for the answers to these questions:
Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society’s well-being? What can the government do about monopolies? What is price discrimination?
Economics
PRINCIPLES OF
N. Gregory Mankiw
Premium PowerPoint Slides by Ron Cronovich
© 2009 South-Western, a part of Cengage Learning, all rights reserved
1
Introduction
A monopoly is a firm that is the sole seller of a product without close substitutes.
Why Monopolies Arise
The main cause of monopolies is barriers to entry – other firms cannot enter the market. Three sources of barriers to entry: 1. A single firm owns a key resource. E.g., DeBeers owns most of the world’s diamond mines 2. The govt gives a single firm the exclusive right to produce the good. E.g., patents, copyright laws
2
In this chapter, we study monopoly and contrast it with perfect competition.
The key difference:
A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power.
MONOPOLY
MONOPOLY
3
Why Monopolies Arise
3. Natural monopoly: a single firm can produce the entire market Q at lower cost than could several firms.
Example: 1000 homes need electricity ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes.
MONOPOLY
Monopoly vs. Competition: Demand Curves
In a competitive market, the market demand curve slopes downward. But the demand curve for any individual firm’s product is horizontal at the market price. The firm can increase Q without lowering P, so MR = P for the competitive firm.
4
Cost
Electricity
ATC slopes downward due to huge FC and small MC ATC 500 1000 Q
P
A competitive firm’s demand curve
$80 $50
D
Q
5
MONOPOLY
1
10/23/2012
Monopoly vs.