115 CFA
File: Economics - Reading 13 - 5. Monopoly

5. Monopoly

b. explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure;

c. describe a firm's supply function under each market structure;

d. describe and determine the optimal price and output for firms under each market structure;

e. explain factors affecting long-run equilibrium under each market structure;

What is a monopoly?
A market with a single seller in a market with high entry barriers

What are examples of legal barriers which could create a monopoly?
1. Public franchise like US Postal Service
2. Government license that limits or restricts the right to buy and sell goods
3. Patents and copyrights

What are examples of natural barriers that could create a monopoly?
Economies of scale are a natural barrier - when one firm is so big that it can supply the entire market at a lower price than two or more firms can. Economies of scale tend to eventually result in the market being dominated by one large firm.

What are other barriers (aside from legal and natural) that could result in a monopoly?
Strong brand loyalty or the increasing returns associated with network effects. E.g., Google.

What factors must a monopoly consider to maximize profit?
To maximize profit, a monopoly must estimate the relationship between price and the quantity of its products demanded.

Why is marginal revenue for a monopoly always lower than the sales price of additional units sold?
A monopoly can choose to price its products however it wants. When it lowers prices it will sell more but with every unit at a lower cost. Thus the marginal revenue for any additional units will always be lower than the sales price of a new unit.

What is average cost pricing?
Average cost pricing is when the government instructs the monopolist to produce enough output that the demand curve intersects the Average Total Cost (ATC) curve. Public welfare improves and the firm makes normal profits (no economic profit) since the price being charged is just sufficient to cover the average cost per unit.

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