... Absolute monopoly: One seller The firm is the industry Firm’s demand is also the market demand.

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Presentation transcript:

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Absolute monopoly: One seller The firm is the industry Firm’s demand is also the market demand.

Why monopolies?.

Governmental monopoly: USPS Government-granted: patents, copyrights Legal barriers to entry.

What is a natural monopoly?

Natural monopoly High fixed cost. Low marginal cost. Continuingly declining long-run average cost.

Monopoly’s supply and demand If no price controls, firm is a complete price maker. In a market, the firm can infuence demand, but the demand is determined by the customers. The firm can set price or quantity, but not both.

Marginal revenue Always below demand, and with steeper slope. Straight-line demand: MR twice as steep Lower price for previous and additional quantities.

quod erat demonstrandum Example: Q = 11 - P Inverse demand: P = 11 - Q R = PQ = (11-Q)Q = 11Q - Q 2 MR = ∂R/∂Q = Q The MR curve has twice the slope of the demand curve. Q.E.D.

Maximum monopoly profit Quantity where MC = MR Quantity less than competitive industry Price higher than competitive. Therefore, deadweight loss

Monopoly supply A supply point, not a curve. At the profit-maximizing quantity and price.

Is monopoly bad? Discuss!

Monopoly bad? Yes, if due to government protection. Can be offset by incentive to creation and invention (copyright, patent). Big firm can have economies of scale. Big firm can afford big research. Can have network externalities.

Policy for natural monopoly Efficient price: MC Rent can pay fixed cost. If price set at average cost, incentive to increase costs. Firm can be owned by the community.

Who gains from monopoly profit?

Who gains from monopoly profit? Market price of stock goes up to make normal returns. Owners at the time it becomes a monopoly are the gainers.

Price discrimination Charging different prices to various customers for the same goods. Perfect price discrimination: complete, Each buyer pays his maximum. Minimal consumer surplus. No DWL. Max monopoly profit.

Does monopoly profit cause DWL? No. Profit does not harm society. Loss of socal surplus is the harm. Correlation is not causation.

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