Chapter+15+JK+&+JJ

CH 15 Monopoly

A monopoly is a firm that is the sole seller in its market, and thus is not a price taker, but rather a price setter. A monopoly arises when a single firm owns a key resource, when government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market more efficiently than many firms. Following is a graph of a monopoly market. However, the monopoly arises because a single firm can supply the entire market more efficiently is special. It is called a natural monopoly and the graph of it is the following. Monopoly faces a downward sloping demand because it is the sole producer of the market.

Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue = marginal cost Then, the monopoly chooses the price at which the quantity is demanded. The monopoly gets to have profit because the price exceeds its marginal revenue.

Unfortunately, when a monopoly occurs, some consumers who value the good more than its cost of production cannot but it. As a result, there is a deadweight loss similar to that of taxes. Policy makers can respond to this by 4 different ways: use antitrust laws to encourage competition, regulate prices, turn the monopoly into a government enterprise, or do nothing at all.

Monopolists often can raise their profits by charging different prices for the same good based on consumers' willingness to pay. This is called price discrimination and is considered good for the economy because it minimizes the dead weight loss. However, it only maximizes the profit of the firm and eliminates consumer surplus.

Ch 15 key terms: monopoly: a firm that is the sole seller of a product with our 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 same good at different prices to different customers.

Sources: http://atlasshrugs2000.typepad.com/atlas_shrugs/images/2008/02/20/monopoly.jpg http://www.appstate.edu/~whiteheadjc/eco3660/boardman/images/fig4-5.jpg http://www.harpercollege.edu/mhealy/ecogif/monopoly/fig11.8.gif

Back to home!