Chapter+Fifteen

 Source: http://www.worldofmonopoly.co.uk/fansite/images/logos/monopoly_intl_pack_logo.png


 A **//Monopoly//** is a firm that has Monopolized a market. What does is mean to monopolize a market? To monopolize means that **there is only one seller or provider of the product or service. So everyone that wants product or service 'A' can only use firm 'A' to get it.** For the firm that has Monopolized the market, this is very good as they have no competition. They don't need to compete with other firms in providing better, higher quality goods or services at cheaper prices. Since they are the sole provider, they can exploit the situation and inflate prices massively, forcing people to pay their price or simply not have access to the product or service, in other words, they are **//Price Makers//** instead of **//Price Takers//**. This is why the consumers suffer; they are at the mercy of the monopoly.

So how do Monopolies happen? Considering the amount of firms in most markets today it seems inconceivable that one firm would be able to knock out everyone else. However it happens, especially when there is a technological development or when one firm owns nearly all of a key resource. **Such hindrances to other companies that prevent them from competing are called //Barriers to Entry//**.

Take Microsoft for example. They were almost able to monopolize the PC market by providing a product that very few people provided, and among those few providers stood out as the best. As the Microsoft Windows operating system gained popularity, people continued to use it as they had become accustomed to it despite the fact that it was not as good as other competitors' products, which is what we have today.

Another example would be the oil companies in the Middle East. While oil companies are not exactly a monopoly, they're very close to what a Monopoly is. A very small group of firms own a key resource that very few other people have access to. Because of this, they can charge a premium for their product, which is why oil prices were so high.

However there are other ways monopolies form other than sheer luck or skill as in the case of Microsoft and oil companies.

Sometimes **having one firm provide all of the product or service by themselves is much more efficient than if several different firms were competing**. In this case, having a monopoly is actually better for both consumer and producer. This is called a //**Natural Monopoly**//.

An easy example of a Natural Monopoly is the municipal water supply. Only one firm provides you with water in your home. This is more efficient than many firms competing to provide you with water because in order to compete, they would each have to lay down pipes and water pumping stations. This is very very costly. It's much more efficient to have one firm supply all the water a home needs through one system of pipes.

So now that we know what a monopoly is, let's look at them from an economic standpoint. How are they different and why?

One key difference is the fact that Monopolies are price makers, not price takers. Meaning they can set the price of their product. In a perfectly competitive market firms are price takers, and can only change the amount of product they produce, however Monopolies can control both to maximize profits.

In order to maximize profits, a monopoly produces where the marginal revenue and the marginal cost curves meet. This production level is usually less than the efficient quantity (as seen in the example graph), however it does maximize the revenue of the monopoly (the purple area on the graph) (I drew the graph wrong, I meant it to be profits, but that would have to exclude the area below the Marginal Cost curve). While maximizing the profits for the monopoly it also creates a deadweight loss.



The darkened area is all deadweight loss as in order to raise the price, the monopoly has to limit the number of people getting it. However there are ways of reducing this deadweight loss and turning it into profit for the firm while also providing the service to people who aren't able to get it.

To do this you need to practice **//Price Discrimination//**. Price discrimination is exactly that, **discriminating people and charging them different prices. People that can pay more are charged more while people that can only pay a small amount are charged a smaller amount**.

Example of this can be taken from things such as airline tickets. Let's say an airline ticket to Hawaii will cost anyone who buys it some time before the date of the flight 500USD. However on the day the flight is due to leave, let's say that all the tickets haven't been sold. At this point the airline could let the flight leave and take what profits it gained from selling the tickets, or it can reduce prices dramatically and let more people staking out the airport buy the empty seats at no cost to the airline.

The graph for this would look like this:

However in practice, it isn't always so perfectly efficient.




Source: http://www.ukuleleman.net/uploaded_images/Monopoly%20cartoon-749301.jpg



Source: http://regentsprep.org/Regents/ushisgov/graphics/3b_5.gif

__Summary __
- monopoly is the only seller in the market, monopoly arises when a single firm has ownership of key resources, exclusive right to produce a good, or smaller cost. - monopoly has downsloping demand curve. when monopoly increases its good, price of its good falls and reduce amount of revenue. - monopoly maximizes profit by producing quantity at which marginal revenue equals marginal cost and chooses price at which that quantity is demanded - monopoly's profit-maximizing level of output is not at the socially efficient point, so it causes deadweightloss - price discrimination is present in monopolies

__Vocabulary __
- monopoly- firm with a single seller produce product without close substitute - natural monopoly- arises because a single firm can supply at smaller cost than two or more firms can - price discrimination- selling same goods at different prices


1. Show deadweight loss in a monopoly and explain why there is a deadweightloss 2. What are 4 public policies toward monopolies?

answers

1. There is deadweight loss in monopoly because it exerts market power by raising the price above marginal cost. This wedge causes the quantity sold to fall short of the social optimum. .

source: http://upload.wikimedia.org/wikipedia/en/thumb/e/ef/Monopoly-surpluses.svg/217px-Monopoly-surpluses.svg.png

2. You can increase competition by enforcing Antitrust Laws, Regulations, Public ownership, or do nothing at all.