Microeconomics Chapter 12

Single Seller
No Close Substitute
Price Maker
Blocked Entry
Nonprice Competition

Economies of Scale
Legal - Patents and Licenses
Ownership or Control of Essential Resources
Pricing and Other Strategic Barriers to Entry (i.e. advertising price cutting etc.)

Because monopolists find it profitable to produce less output at a higher price than those in a competitive market.

1)MR < P
2)The monopolist is a price maker
3)The monopolist sets the price in the elastic region of demand

Monopolist will choose to produce up to the point where MR = MC where the price meets D because that is where demand creates most profit

1)Find MR = MC for output
2)Find price by extending a vertical line upward from MR = MC
3) TR - TC
TC (ATC of profit max output output) and TR (profit max output profit max price)

May operate without profit in short run
Loss per Unit = ATC - P at MR = MC output

TR test determines that inelastic region requires lower prices and more output therefore a lower total revenue

When P > MC resources are under allocated and produce substantial economic profits because they hold market power

No, because the firm is the industry therefore market demand and individual firm's demand are the same

Monopolists transfer income from consumers to the monopoly as revenue, impose a "private tax" on consumers and create substantial economic profit

And charge more due to entry barriers

lowest long run ATC

Economies of scale
X-inefficiency
Need for monopoly-preserving expenditures
"Very long run" perspective, allowing technological advancement

may not support a large number of firms producing at minimum efficiency scale
(an industry with a few firms will have lower ATC than an industry with a large amount of firms)

A product's ability to satisfy a large number of consumers at the same time

Present value of a product to each user, including existing users, increasing as the total number of users rises (i.e. email service)
-Could drive a market to monopoly
-Enables rapid growth to achieve economies of scale

Occurs when a firm produces output at a higher cost than is necessary to produce it
-Happens because management goals
-More likely in monopoly industry

Any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else's or society's expense
-Monopolists will go to great expenses to acquire and maintain monopoly
-Monopoly involves higher cost and less efficiency

Firms reduce long run costs by discovering and implementing new technology
-Monopolies lack incentive to progress technologically
-Research for improvement is necessary to maintain monopoly

On a case by case basis

Firms engaging in anti-competitive actions creating long-lasting inefficiency can be prohibited from business
Natural monopolies may be allowed to expand if no competition emerges
Unsustainable monopolies can be ignored

Selling a specific product at more than one price when the price difference is not justified by cost differences

Charging each customer in a single market the maximum price they are willing to pay
Charging each customer one price for the first set of units purchased and a lower price for subsequent users
Charging some customers one price and other customers a different price

Monopoly Power: Seller must posses a degree of monopoly power
Market Segregation: Ability to clearly segregate buyers into distinct classes
No Resale: Good cannot be resold

Airfare
Movie Theaters/Golf Courses
Coupon Cutters
International Trade

it eliminates or lessens another firm

When a firm produces only those types of goods and services that are more desirable in the society and also in high demand
(P = MC)

Not productive - price for the given monopolist output is less than output where ATC is lowest
Not Allocative - At monopolists output level P > MC

When a firm is using all of its resources efficiently and still produce normal profit
(P = MC = Minimum ATC)

P(MR) = MC achieves allocative efficiency
Cons: Price is below ATC therefore creating short-run loss and long-run exit
Government can compensate for missing revenue with subsidies and/or condone price discrimination

P = ATC
Set a price high enough for monopoly to break even and continue operation

Loss for firm and would require permanent subsidies