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Chapter 15
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Monopoly
While a competitive firm is a price taker, a monopoly firm is a price maker.
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Monopoly
A
firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes.
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The government gives a single firm the exclusive right to produce some good.
Patents, Copyrights and Government Licensing.
Costs of production make a single producer more efficient than a large number of producers.
Natural Monopolies
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0
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Quantity of Output
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Price
Demand
Demand
0 Quantity of Output 0 Quantity of Output
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A Monopolys Revenue
Total
Revenue
P x Q = TR
Average
Revenue
Revenue
TR/Q = AR = P
Marginal
DTR/DQ = MR
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A Monopolys Marginal Revenue A monopolists marginal revenue is always less than the price of its good.
The
demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.
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A Monopolys Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q).
output effectmore output is sold, so Q is higher. The price effectprice falls, so P is lower.
The
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Marginal revenue
1 2 3 4 5 6 7 8
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Monopoly price
Marginal cost
Marginal revenue 0
QMAX
Quantity
P = MR = MC
For
P > MR = MC
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C Demand
Marginal revenue 0
QMAX
Quantity
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Reduced
the market power of the large and powerful trusts of that time period.
Clayton
Act (1914)
Strengthened
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Loss
Demand
0
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Quantity
Price Discrimination
Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same. In order to do this, the firm must have market power.
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Price Discrimination
Two
Be able to separate the customers on the basis of willingness to pay. Prevent the customers from reselling the product.
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