Chapter+15+Monopoly+(Joon,+Scott,+and+Steven)

Key Terms:
 * Monopoly**: a firm that is the only seller of a product with any close substitutes
 * natural monopoly**: a monopoly that is formed because a single firm can supply a good or service to the entire market at a smalller cost that other firms.
 * price discrimination:** the business practice of selling the same good at various prices to different clients.

You have probably used or is using Microsoft's Windows operating system. Microsoft is a great example of a **monopoly**. But what is a monopoly? Monopoly is the opposite of competitive firm. A competitive firm "takes" the price, but a monopoly firm "makes" the price.

A firm is a **MONOPOLY** if it is the **only** seller of its product and the product has no substitutes.
 * A key resource owned by a single firm
 * The government allows one firm to exclusive right to manufacture a certain good or service.
 * The cost of production make a single producer more efficient than many producers.

Let's discuss each of the points mentioned above. Key Resource: For example, you own the only oil well in the world world. You own a key resource that no one else owns. You create a monopoly of oil. Government Creates Monopolies: The government gives right to one person or firm to sell/produce a certain good. Patent and copyright laws are part of governement made monopolies. For example, the US government gave a company called Network Solutions, Inc. to maintain the database of all .com .net .org Internet addresses. This monoploy is good because it unifies the internet data and is comprehensive for everyone.

Natural Monopolies: A situation when a single firm can supply a good or service at a lower cost than two or more firms can.

Examples: water supply and bridge

**Monopoly versus Competition**
Key difference: monopoly firm can change price output, but competition firms can't. Because competitive firms take the price, the curve is horizontal. Because the monopoly firm is only producer and make the price, the curve is facing downward slope in demand. Therefore, the monopoly has to accept a lower price if it wants to sell more products. Credits: http://legacy.lclark.edu/~bekar/Mankiw/ch15/notes.htm

When a monopoly increases amount it sells, it has two effects on total revenue. Total Revenue= P X Q
 * The output effect: More output is sold, so Q is higher.
 * The price effect: The price falls, so P is lower.

Price Maximization
A monopoly earns the maximum profit by choosing quantity at which **marginal revenue equals marginal cost**. (Point A on graph below) The price is then decided by where that quantity meets the price on the demand curve. (Point B on graph below) Credits: http://spot.colorado.edu/~kaplan/econ2010/section10/gifs/fig102.gif

Competitive firm: P=MR=MC Monopoly firm: P>MR=MC

A Monopoly's Profit
Profit=TR-TC Profit= (TR/Q-TC/Q) x Q Profit= (P-ATC) x Q Credit: http://media.wiley.com/Lux/01/9701.nfg001.jpg The area ABCD is the profit of the monopoly firm. The height of the box, DE is price minus average total cost. The width, DC, is the number of units sold.
 * [Refer to the graphs above]**

The Welfare Cost of Monopoly
- The socially efficient quantity is found where the demand curve and the marginal-cost curve intersect. Picture credits: http://foper.unu.edu/course//wp-content/uploads/2007/02/fige06.gif [Refer to the graph above] pM= profit monopoly QM= Monopoly quantity Q*= Efficient quantity The colored triangle(A) is the deadweight loss. Because a monopoly sets the price above MC, not all consumers who value the good at more than its cost buy it. So, the quantity sold is below the socially efficient quantity. The triangle represents the deadweight loss, the social cost of the monopoly.
 * ===Deadweight Loss===

Public Policy Toward
Government responses toward monopoly:
 * Tries to make the monopoly firms more competitive
 * Limit the monopoly firm's behaviors
 * Turns private monopolies into public firms
 * Do nothing

Increasing Competition With Antitrust Laws:
The antitrust laws give government to regulate behaviors of the monopolies to promote competition. They allow government to preven mergers. For example, Coca-Cola and Pepi tried to merge into a monopoly. The government in 1984, split up AT&T into 8 different smaller companies.

Regulation:
The governments directly regulate the firms' behaviors. For example, the natural monopoly companies, water and electricity supplying companies cannot choose the price they want to sell at. The government decides their prices.

Public Ownership:
Rather than regulating monopoly, the government sometimes runs the monopoly by taking over ownership. In Europe, for example, the government runs the natural monopolies of telephone, water, and electric companies. In the US, the government runs the Postal Service.

Do Nothing
Sometimes monopolies are so small, the government does not do anything about them. A great example is the hot dog stand at a baseball stadium. Only the stadium is allowed to sell hot dogs during a baseball game. But this monopoly is so small that the government does nothing about it.

Price Discrimination
Movie Tickets: Movie tickets charge lower price for children. Movies raise price by price discriminating.

Airline Prices Seats on airplanes are sold at many different prices. There is first class, business class, and economy class. Different people have different willingness to pay. Discriminating prices balances to maximize profit.

Discount coupons Coupons are also balance the willingness to pay. Coupons, by discriminating prices, encourage people to participate in economic activity. Rich and busy people would not spend time to find the coupon, but a poor person would search for the coupon and buy the good.

Financial Aid Financial aid is a great example because rich people would not request for financial aid, but poor people would. This balances the budget, and allows poor people to attend and receive education.

Conclusion: This chapter discussed the behavior of firms that have control of the price. We learned about different types of monopolies, how they exist, how they are influential, and how the market tries to prevent them. Monopolies are common whether you go to a baseball game or turn on your computer, you are a consumer of a monopoly firm.