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Monopoly Market
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A market with a single supplier of a good or service that has no close substitutes and in which there are economic or legal barriers to the entry of new competition.
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Two Key Features of a Monopoly Market
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-No close substitutes
-Barriers to entry
-Barriers to entry
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Characteristics of a Monopoly Market
Absence of close substitutes
Absence of close substitutes
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Even a single seller in a market faces competition from substitute goods outside its market. The closer the available substitutes, the greater the competition and the less market power the monopolist can exercise.
If a good has a close substitute, even though there is only one seller, the market is effectively competitive. The single seller is unable to exercise any significant degree of market power.
If a good has a close substitute, even though there is only one seller, the market is effectively competitive. The single seller is unable to exercise any significant degree of market power.
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Characteristics of a Monopoly Market
Barriers to entry
Barriers to entry
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Anything that protects a seller from new competition, for example
-Exclusive ownership of an essential resource
-Economies of scale
-Government grant of an exclusive franchise.
-Exclusive ownership of an essential resource
-Economies of scale
-Government grant of an exclusive franchise.
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Barriers to Entry
Exclusive ownership of an essential resource
Exclusive ownership of an essential resource
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A seller can create its own barrier to entry if it owns a significant portion of a key resource required for the production of the good or service.
In practice, monopolies rarely arise for this reason. The market for most resources is national or even international, and ownership of most resources is dispersed among a large number of people and nations.
In practice, monopolies rarely arise for this reason. The market for most resources is national or even international, and ownership of most resources is dispersed among a large number of people and nations.
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Barriers to Entry
Economies of scale
Economies of scale
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Economies of scale arise when a single seller can supply the entire market at lower average total cost than two or more sellers.
A monopoly that arises because of economies of scale is called a natural monopoly. Natural monopoly provides an economic argument for regulated public utilities.
Markets characterized by economies of scale often become competitive over time because of technological advances or because of natural growth in the size of the market.
A monopoly that arises because of economies of scale is called a natural monopoly. Natural monopoly provides an economic argument for regulated public utilities.
Markets characterized by economies of scale often become competitive over time because of technological advances or because of natural growth in the size of the market.
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Barriers to Entry
Government grant of an exclusive franchise
Government grant of an exclusive franchise
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Legal barriers to entry are the source of most present-day monopolies.
Entry into the market or competition within the market are restricted by the granting of a public franchise, government license, patent, or copyright.
Entry into the market or competition within the market are restricted by the granting of a public franchise, government license, patent, or copyright.
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Monopoly Equilibrium
Demand and marginal revenue are negatively-sloped
Demand and marginal revenue are negatively-sloped
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Market demand is negatively-sloped. The monopolist faces a tradeoff between price and quantity sold.
To obtain a higher price, the monopolist must lower quantity. Or, if it wants to sell a larger quantity, it must lower price.
To obtain a higher price, the monopolist must lower quantity. Or, if it wants to sell a larger quantity, it must lower price.
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Monopoly Equilibrium
Marginal revenue is less than price
Marginal revenue is less than price
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An increase in quantity has two opposing effects on total revenue:
Output effect: An increase in TR equal to the price of the additional quantity sold, which is partly offset by the
Price effect: A decrease in total revenue equal to the decrease in price required to sell the additional quantity, multiplied by the quantity sold before the price decrease.
The marginal revenue curve is negatively-sloped but lies below the demand curve at each quantity: MR<P at all Q.
Output effect: An increase in TR equal to the price of the additional quantity sold, which is partly offset by the
Price effect: A decrease in total revenue equal to the decrease in price required to sell the additional quantity, multiplied by the quantity sold before the price decrease.
The marginal revenue curve is negatively-sloped but lies below the demand curve at each quantity: MR<P at all Q.
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When a monopolist earns short-run profits
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Because new competitors are barred from entering the market, a monopolist's short-run profits are not competed away. They persist into the long-run.
Without new competition to increase quantity and lower price, the monopolist's long-run equilibrium quantity and price are the same as the short-run equilibrium quantity and price.
Without new competition to increase quantity and lower price, the monopolist's long-run equilibrium quantity and price are the same as the short-run equilibrium quantity and price.