BTY+Chapter+15

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(Chapter 15: MONOPOLY)
 

key terms:
monopoly: a firm that is the sole seller of a product with out close substitutes natural monopoly: a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms price discrimination: the business practice of selling the same good at different prices to different customers cause of monopolies:

barriers to entry-
 1. a single form has the power over a key source 2. a single firm is given exclusive powers to produce a specific good or service 3. a single producer is more efficient with the costs of production than others =   =

monopoly resources-
The main way to become a monopoly is to have the single ownership over a key resource. This gives the owner of a monopoly more market powers than that of competitive market. For example, in a village, rice is their primary source of food. If only one family owns the field with rice, they'd have the monopoly for rice. As a result, they are able to manipulate the price higher than the marginal cost, since they have a lot of power in the market. government- created monopolies- At certain times, the government sanctions exclusive rights to certain person or firm. Therefore, the firm now has monopoly on the certain good. In the past, monarchs gave exclusive rights to their families and friends. Nowadays, government grants monopoly based on public interest. The biggest examples is the patent and copyright laws. Therefore, when a new drug to cure something is invented, the government grants the inventor an exclusive right, patent, which allows the inventor or the company to manufacture and sell the drug for 20 years. Just like scientists, there are similar rights for writers. Therefore, when a writer finishes a book they are guaranteed a copyright law. This guarantees that only the author can decide to print and sell the work. These government given monopolies are motivations for innovation. Allowing these monopolists to have big market power motivates them to create new inventions to gain the power to earn more money.

natural monopolies-
=  Natural monopoly provides goods at a lower cost than having more than one firm producing it. This occurs when economies of scale are over the relevant range of output. As a result a single firm can produce any number of products at a more efficient cost than having more than one firm. For, having more firms makes the number of output decrease per firm, but higher average cost. = = <span class="Apple-style-span" style="font-size: 11px; font-weight: normal; line-height: normal; white-space: pre-wrap;"> = = <span class="Apple-style-span" style="font-size: 11px; font-weight: normal; line-height: normal; white-space: pre-wrap;">The graph shows that when more firms are in the market, the production is divided and the ATC rises although the production decreases. Therefore, a single firm as a producer would be more efficient in typical natural monopolies, as shown in the graph. = =<span style="color: rgb(183, 12, 202);"> <span class="Apple-style-span" style="font-size: 11px; font-weight: normal; line-height: normal; white-space: pre-wrap;"> <span class="Apple-style-span" style="font-size: 11px; font-weight: normal; line-height: normal; white-space: pre-wrap;"> monopoly vs. competition-  =

[[image:yjjj.png width="303" height="274" align="left"]]
As shown in previous chapter, the competitive firms have very negligent or no power at all in mark

et. However, monopolies have the power to influence the price of its output by controlling its quantity of production. An easy way to compare is through the two firms' demand curves. The demand curve of the competitive firm is perfectly horizontal since the no matter the manipulation of the quantity produced, these firms are price takers. However, the monopoly demand curve shows a downwarding slope. Therefore, they can control their price. If the monopoly wants to increase the price, they can produce less and vise versa. =<span class="Apple-style-span" style="font-weight: normal; color: rgb(236, 4, 194);">a monopoly's revenue- = -Marginal Revenue= Change of Total Revenue/ Change of Quantity - In monopoly, MR is always smaller than the price. - Differing from the MR of competitive firms, monopoly's MR cause two effect on TR (PxQ) 1. output effect: more output is sold, so Q is higher 2. price effect: the price falls, so P is lower -It's different from competitive firms because they are price takers unlike monopolies. Therefore, when quantity increases by 1, the price for every unit decreases and visaversa, which is the reason why MR<P. - Monopoly's demand and MR curve start at the same point, since MR of the first unit equals to the price. However, as quantities increase, the MR falls while price continues to rise. As a result, it causes the MR to be below the demand curve. Hence, MR can be negative if the price effect on revenue is bigger than the output effect. =<span class="Apple-style-span" style="font-weight: normal; color: rgb(164, 18, 206);">profit maximization- = - The monopoly maximizes its profit at the point when MR=MC. Then it will alter the price based on the willingness to pay of the consumers at that quantity. =<span class="Apple-style-span" style="font-weight: normal; color: rgb(224, 66, 250);">a monopoly's profit- = - PROFIT= TR-TC or (TR/Q-TC/Q)xQ which can be simplified to PROFIT= (P-ATC) x Q since TR/Q= Price and TC/Q= ATC =<span class="Apple-style-span" style="font-weight: normal; color: rgb(154, 22, 182);">the welfare cost of monopoly- = - Monopoly is no efficient since its price is above the marginal cost. Since a monopoly isn't reached to equilibrium through the invisible hand, it does not maximize the efficiency in the economy. =<span class="Apple-style-span" style="font-weight: normal; color: rgb(204, 15, 194);">deadweight loss- = - If surplus was maximized, the consumer surplus and producer surplus would be equal. Therefore, the quantity is socially efficient when D=MC. - When MC< D, increasing output would increase profit - When MC>D decreasing output would increase profit - Monopolists choose to produce under the efficient quantity because that way, the value to the buyers i greater than the cost; therefore, they would gain more profit. However, it causes lack of efficiency. - This inefficiency is shown by deadweight loss. This is cause since monopoly charges high price over the MC, which causes some buyers not to buy the product. Therefore, the number of good sold and bought lies below the socially efficient level. - The deadweight loss (the triangle) shows the consumer's willingness to pay and cost of monopoly producer. =<span class="Apple-style-span" style="font-weight: normal; color: rgb(192, 24, 231);">monopoly's profit: a social cost? = - The market power does not give monopoly more profit - Like other markets, the welfare of consumers and producers matter - Although it has the market power, monopoly does not affect the market's total surplus - It faces problems because it produces below the socially efficient level =<span class="Apple-style-span" style="font-weight: normal; color: rgb(173, 20, 184);">policy toward monopolies- = - Because monopolies fail to allocate resources efficiently, and cost the buyers higher prices than the marginal cost. Therefore, governments take actions by.. 1. Increasing Competition - The government imposes anti-trust acts to prevent monopoly and create competition. This way, they can prevent mergers, since they merge to reduce production cost and competition. 2. Regulation - The government assigns the price of goods. 3. Public Ownership - The government takes over the monopolies and runs it. 4. Doing Nothing - Because taking actions have drawbacks, they might just leave the monopolies alone. =<span class="Apple-style-span" style="font-weight: normal; color: rgb(192, 33, 192);">price discrimination- = - Because monopoly has market power, it also has the power to control its price depending on the consumer's willingness to pay. Therefore, they charge higher prices to customers whose willingness to pay is high while they charge lower prices to consumers who have a lower willingness to pay. Examples: Movie tickets, Airline Prices, Discount Coupons, Financial Aid, and Quantity Discounts. These examples can charge different prices depending o the people's age, willingness to pay and other factors

Questions & Answers: 1. What kind of power does monopolies have? 2. How is monopoly undesirable? 3. Do taking action on removing monopolies have drawbacks? 4. At white point is monopoly's profit maximized? 5. Why is there price discrimination?

1. market power 2. it reduces competition; therefore, it does not allocate resources efficiently 3. Yes; therefore, sometimes, the government refuses to take any action to prevent it 4. MR=MC 5. To earn more profit by charging people with higher willingness to pay more than those who have lower willingness to pay.

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