Microeconomics Exam 3 PT.2

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.

-No close substitutes
-Barriers to entry

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.

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.

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.

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.

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.

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.

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.

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.