Chapter+15+Monopoly.JAKS

= Chapter 15.  Monopoly =



**Definitions**

 * **Monopoly**: a firm that is the sole seller of a product without 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

**Learning Objectives**

 * Impact of market power on a firm’s cost and the price at which it sells its product to the market.
 * How and Why monopolies occur.
 * Strategies of a monopoly
 * Comparisons to competitive firms
 * Gains and losses of monopolies
 * Government intervention



<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**I. Introduction**
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">__What is a monopoly?__ A firm (business) is a __**Monopoly**__ if it is the main, dominant, sole seller of its product and does not have many substitutes. A very global and famous monopoly would be Microsoft’s Windows. __Why are there monopolies?__ ====<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Businesses become monopolies when other firms have trouble entering the market, or more specifically, have trouble succeeding in the market. This situation is referred to as barriers to entry. __//Barriers to entry//__ is caused by three main reasons. ==== <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> I’m going to dig deeper on each of the three causes of barriers to entry. It is natural for monopolist firms to have greater market power than other small firms in the competitive market. However, this does not mean that naturally they own all input resources. Actual economies are large, and thus many people own resources and furthermore there is also international trade. __Therefore, domination of resources is not the main reason for barriers of entry.__ The Government grants a monopoly for the good of the public. For example, Network solutions Inc. is a government supported monopoly (maintaining database for internet addresses) in case the government needs organized data. There are two ways government supports monopolies: __patent and copyright.__ <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> #3 More efficient cost of production = Natural Monopolies A **__natural monopoly__** is the term we use to describe 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. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> When production is divided among the firms, each firm produces less and average total cost rises. Thus, a firm produces any given amount at its minimum cost.
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A key resource (input) is owned by the dominant firm.
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The dominant monopoly has government’s support - the government gives the firm exclusive rights to produce its goods/service
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The costs of production make a single producer more efficient than a large number of producers. This is called natural monopoly (I’ll cover this more in depth later)
 * 1) 1 Domination of Resources
 * 1) 2 Government Supported Monopolies
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A firm can apply to the government for a patent. If the product is approved (has to be truly original) then the __government allows the firm monopolistic rights for a specific amount of time.__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A copyright is similar, but the government gives the novelist, artist, producer, basically the creator a guarantee that nothing can be copied or taken without their permission. __So basically the copyright makes the creator a monopoly.__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">There are pros and cons to these government supporting methods. It gives people the incentives to create and innovate, which will thus benefit the society. However, the costs of monopoly pricing is the downside of such methods.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">__For any given amount of output, a larger number of firms leads to a smaller output per firm and higher average total cost.__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> When the cost of a factory or building the main source of output is costly, its better to use the already-existing ones of a monopoly.

What determines whether a firm is a //natural// monopoly or a normal monopoly? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The __size of the market__. If the market is too big, it might be impossible for a natural monopoly to support the market. And thus, another dominator, a competitor might enter the market.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**II. Monopolies as Decision Makers. (Production and Pricing)**
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> __Monopoly versus Competition.__ Difference: its impact as price makers. In a competitive market, firms are price takers because there are tons of competition and its existence is relatively minor. However, a monopoly is basically the very opposite of a competitive firm. It is the only firm and therefore controls the price by altering the quantity of production etc. Market demand curves:combination of price and quantity available to a monopoly. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Monopoly’s Revenue Before we talk about a Monopoly’s Revenue, let’s just review the basics of competitive market’s revenue. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> __Monopolistic Revenue behaviors__: its marginal revenue > price of its good. This is because of the downward-sloping demand curve. To increase the amount sold, monopoly has to decrease the price. Competitive market’s revenue and monopoly firm’s revenue is very different. There are 2 effects of monopoly’s revenue: <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">This is because::: a competitive firm is a price taker - its marginal revenue = average revenue. BUT a monopoly firm’s revenue is less than the price because in order to increase production, __it must decrease the price for each unit of production; this reduces revenue.__ Maximizing Price Intersection of the marginal revenue curve and the marginal-cost curve = maximum profit <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Difference from competitive firm: <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Profit “Chi-ching” Competitive firms aren’t always different from monopolies. The equation for profit is the SAME. TR - TC = (TR/Q - TC/Q) x Q = (P - ATC) x Q
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Competitive Firms: Only at a specific price, consumers will buy any quantity: this is the definition of a perfectly elastic demand.
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Monopoly: Although it can control its price, it has to accept a lower price if it wants to sell more. Basically it can choose any point on the demand curve but nowhere above or below the line.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Total revenue: the amount paid by buyers and received by sellers of a good: price of the good x quantity sold
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Average revenue: total revenue / quantity sold
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Marginal revenue: change in total revenue from an additional unit sold.
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Output effect: more output sold, Q increases
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Price effect: The price falls, P drops.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> How: By choosing the quantity at which marginal revenue = marginal cost (basically copying what a competitive firm does).
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Why: When marginal cost is less than marginal revenue the firm increase profit by increasing the amount of production.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Competitive firm: price equals marginal cost. P = MR = MC
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Monopoly: price exceeds marginal cost. P > MR = MC

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**III. The Losses (Welfare Cost)**
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A monopoly is different from a perfectly competitive free market, so it definitely has the losses; __failing to maximize the total economic well being.__ Deadweight loss social efficient quantity = __where the demand curve and the marginal-cost curve intersect.__ This point tells us that the monopoly produces less than the socially efficient quantity of output. shows the inefficiency monopoly creates. When a price above marginal cost is charged, some consumers do not end buy the good. The monopoly pricing actually prevents some beneficial profit. This inefficiency + other factors of inefficiency is the deadweight loss of a monopoly. The deadweight loss is similar to that of tax’s. __The wedge causes the quantity sold to fall short of the maximum point.__ When we think of monopolies, we think selfish and greedy. However, monopolies aren’t necessarily bad. Their production does not negatively effect the total surplus (consumer surplus + producer surplus ) - which is what everybody really cares about. __Although the producer surplus is relatively bigger, total surplus is unchanging.__

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<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**IV. Public Policy Toward Monopolies**
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> 4 ways the government tries to increase the amount of production of monopolies <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> What does __Antitrust law__ do? It gives the government various ways to enhance competition. How? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> #2 Regulation __Government regulation is common for natural monopolies.__ The government basically controls the price so it could equal marginal cost (customers will buy the quantity of the monopolist’s output that maximizes total surplus) and making allocation of resources efficient. However there are 2 problems. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> #3 Public Ownership Rather than regulating natural monopoly, run by a private firm, __the government can run the monopoly itself.__ Although it is the most preferable method, when government bureaucrat do a bad job, the losers are the customers and taxpayers.
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Making monopolized industries more competitive (with antitrust laws)
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Regulating the behavior of monopolies
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Turning some private monopolies into public enterprises
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Doing nothing
 * 1) 1 More competition with Antitrust Laws
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">prevent merges (a joint-production that would eventually reduce economic well-being of the country as a whole)
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">break up huge companies into separate smaller companies
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">prevent companies from coordinating their activities in ways that make markets less competitive.
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">cons = antitrust laws prevent benefits of merging (synergies) by preventing merging all together.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">the price set by regulators, equal to marginal cost, the price would be less than the firm’s average total cost and the firm would lose money. = Ways to solve this problem: subsidizing. The regulators can allow the monopolist to charge a price higher than marginal cost
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">it gives monopolist no inventive to reduce costs.
 * 1) 4 Doing Nothing

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">V. Price Discrimination
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> It is the business practice of selling the same good at different prices to different customers. __This is only possible for firms with some market power.__ 3 main characteristics about this method: <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">*Examples of Price Discrimination: Movie tickets, Airline prices, discount coupons, financial aid, quantity discounts
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">it is a very rational strategy for a profit-maximizing monopolist
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">requires the ability to separate customers according to their willingness to pay
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">it can raise economic welfare by eliminating inefficiency inherent in monopoly pricing

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">VI. Conclusion
<span style="color: #ff0600; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Summary of all this in **90** seconds Ready Set Go!! =<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> = <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">media type="youtube" key="F9qw7LeeCKw" height="344" width="425"

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Monopolies are common. Firms in competitive market have at least come power regulating the price of their product. Firms with substantial monopoly power, the actual price makers, are rare. Few goods are truly unique and rare. Most have alternatives. These dominators don’t necessarily harm the economic society, however they don’t benefit the economy either.

FYI: A monopoly does not have a supply curve because the demand curve determines basically everything : revenue curve, monopoly’s profit-maximizing quantity. So the demand curve is the supply curve.



=<span style="color: #00ff00; display: block; font-family: Impact,Charcoal,sans-serif; font-size: 230%; text-align: center;"> = = = = = =<span style="color: #00ff00; display: block; font-family: Impact,Charcoal,sans-serif; font-size: 230%; text-align: center;">THANK YOU =

<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Review Questions
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following events will cause the demand curve for a normal good such as steak to shift to the left? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Hamburgers and fries are complements, and Mr. Jones is a potato farmer. Mr. Jones is most likely to sell fewer potatoes at a lower price if <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> If Soda A and Soda B are substitutes for each other, which of the following would cause the price of Soda B to rise? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following will cause the producers of flavored coffee to offer more for sale at all prices? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Answers
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Decrease in consumer incomes
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">An increase in consumer incomes
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A decrease in the price of chicken, a substitute for a steak
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The release of a new medical report saying that steak consumption improves health
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A decrease in cattle prices.
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The price of hamburgers decreases
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The price of hamburgers increases
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Farming technology advances
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The wages of farm workers rise
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">New legislation requires hamburgers to weigh no more than 1/4 lb
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A new study is released showing that consumption of soda leads to diabetes
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The price of aluminum cans decreases
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A new law is passed requiring the recycling of all aluminum cans.
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The price of Soda A increases.
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">the price of Soda A drops
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A fungus attacks the coffee crop.
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Coffee bean pickers negotiate an increase in wages
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A decrease in the price of coffee flavorings
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Government takeover of coffee farms in one of the most important coffee-producing countries
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A study showing that coffee consumption encourages weight loss

<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Work Cited
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Image: http://atlasshrugs2000.typepad.com/atlas_shrugs/images/2008/02/20/monopoly.jpg Video: http://www.youtube.com/watch?v=F9qw7LeeCKw Review Questions: Kaplan AP Macro/Micro Economics 2009 Image: http://www.monopoly.com.au/images/mr_monopoly.gif
 * All Graphs hand produced by JAKS**