Chapter+15-+Monopoly

 ​ Introduction: In this section, we will talk about how monopoly maximizes its profits by adjusting the production and prices of its goods. Thus, becaues the monopoly's prices aren't followed by the consumer's demand, we will also look at why monopoly is not the best interest of society. Also, due to the problems that monopolies cause for the society, we will also examine the government polices to help the monopolies.

Here is the word document version of the notes below: Monopoly has no close competitors, thus it can influence the market price of its product, which means they are the price maker. In monopoly, the firm maximizes its profit when the price is greater than the marginal cost, which means they can charge higher prices than those firms of the competitive markets where the firms are the price takers. However, the outcome of the market with monopoly is often **not** **in the best interest of society**.
 * Glossary:**
 * **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 ||
 * Monopoly[[image:Monopoly-UK-edition-board-games-291442_1024_1024.jpg width="405" height="405" align="right" caption="Source: http://www.fanpop.com/spots/board-games/images/291442/title/monopoly-uk-edition"]]**

Monopoly means that firm is the sole seller of a product without close substitutes. Monopoly arise because there are barriers to entry, which means other firms can't enter the market and compete with it. The reasons for this barrier includes: How Monopolies make production and pricing decisions ** The difference between a competitve market and a monopoly is that the **monopoly’s ability to influence the price of its output.** Because monopoly is a price maker, it can control the outcome price of its products. We can compare theses two types of firms by comparing the demand curves of each firm. In a **competitive market:** However, in a **Monopoly:**  The monopoly’s revenue **might depend on the amount of goods that it produces**, because as Quantitiy increases, the Price decreases, which illustrates the downward shape of the demand curve. The average revenue for monopoly always equal the priceof the good, which same for the compeptitive market. However, for the marginal revenue, which is the amount of revenue that the firm receives for each additional unit of output, it is always less than the price of its good because a monopoly faces a downward-sloping demand curve. Thus, in order to increase the amount of good the monoply solds, it needs to lower the prices. However, when the monoply increases the amount it sells, it has two effects on Total Revenue (P * Q), which are: Because the Average Revenue curve equals Price, **Demand curve also equals average revenue**. Both demand and marginal revenue curve start at the same point on the vertical axis because marginal revenue of the first unit sold equals the price. However, the monopolists' marginal revenue on all units after the first is less than the price as the quantitiy increases. Margianl revenue curve can also be **negative** when price effect on revenue is more than the output effect or when the firm produces an extra unit of output, which makes the price to fall enought so that the total revenue declines, although the firm is selling more units.
 * Why monopoly arise **
 * **Monopoly resources**
 *  A key resource is owned by a single firm
 *  //Greater market power//
 *  For necessities, monopolist could command high price
 *  Not the real reason in real life
 * **Government-Created Monopolies**
 *  The gov. gives a single firm the exclusive right to produce some good or service
 *  Sheer political clout of the would-be monopolist
 *  //Patent & Copyright //
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; msobidifontfamily: Symbol; msofareastfontfamily: Symbol; msolist: Ignore;"> <span style="font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-fareast-font-family: 바탕; mso-fareast-language: KO;">Cost: Higher prices
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; msobidifontfamily: Symbol; msofareastfontfamily: Symbol; msolist: Ignore;"> Benefits: <span style="font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-fareast-font-family: 바탕; mso-fareast-language: KO;">Increased incentive for creative activity
 * <span style="font: 7pt 'Times New Roman'; mso-fareast-font-family: 'Courier New'; msofareastfontfamily: 'Courier New'; msolist: Ignore;"> **Natural Monopolies**
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> //Single firm can supply a good or service to an entire market at a smaller cost than could two or more firms// (Water)
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> Economies of scale over the relevant range of output
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> ATC curve continually declines
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> Less concerned about new entrants
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; msobidifontfamily: Symbol; msofareastfontfamily: Symbol; msolist: Ignore;"> Knows that they can achieve the same low costs because each firm would have a smaller piece of the market
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> As the size of the market increase, evolve to competitive market
 * Price = horizontal line
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> B/C a Competitive firms can sell as much or as little as it wants at this price, the Competitive Firms faces a horizontal demand (perfectly elastic)
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> Sell with many perfect substitutes
 * Demand curve = Market demand curve (downward)
 * Demand curve = Market demand curve (downward)
 * Because as P increase, Consumer buy less and as Q decreases, P increases
 * Market demand curve describes the combinations of P and Q that are available to a monopoly firm
 * By adjusting the Q produced or P changed, the monopolist can choose any point on the demand curve, but it can not choose a point off the curve
 * The **output effect**: more output is sold, so Q is higher
 * The **price effect**: the price falls, so P is lower
 * These r educes revenue on the units it was already selling, which makes the monopoly’s marginal revenue < Price

Monopoly maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and then using the demand curve to find the price that will induce consumers to buy that quantity For competitive firm: P = MR = MC However, for a monopoly firm: **P > MR = MC** To calculate a monopoly’s profit, look at this equation
 * Profit Maximization**
 * Profit = TR – TC
 * Profit = (TR/Q – TC/Q) * Q
 * Profit = (AR – ATC) * Q
 * <span style="color: #0000ff; font-family: Arial,Helvetica,sans-serif; font-size: 130%; msobidifontfamily: 'Times New Roman';">Profit = (P – ATC) * Q

**The** **Welfare Cost of Monopoly** The total surplus measures the economic well-being of buyers and sellers. In review, consumer surplus means the consumers’ willingness to pay for a good, which is the amount they actually pay for it. Producer surplus means the amount producers receive for a good, which is their costs of producing it. <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">In contrast to a competitive firm, the monopoly charges a price above the marginal cost. Therefore, f <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">rom the standpoint of consumers, this high **price makes monopoly undesirable**. However, from the standpoint of the owners of the firm, the **high price makes monopoly very desirable**. Thus, monopolies fail to maximize total economic well-being because of the following reason: Public policy toward monopolies ** In Monopoly, firms fail to allocate resources efficiently because it produes less than the socially desirable quantity of output and charge prices above marginal cost. thus the government policy tries to prevent these problems by: >> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;"> **<span style="color: #000000; font-family: Arial,Helvetica,sans-serif; font-size: 80%;">Price discrimination ** <span style="color: black; font: 7pt 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Courier New'; msobidifontsize: 32.0pt; msofareastfontfamily: 'Courier New'; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">Business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same. <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';"> But, this is not possible when a good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some //market power//. <span style="font: 7pt 'Times New Roman'; mso-fareast-font-family: 'Courier New'; msofareastfontfamily: 'Courier New'; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Perfect Price Discrimination is <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different prices. <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Two important effects of price discrimination that: Examples of price discrimination include: This video will be the conclusion for this chapter: media type="youtube" key="YNcPxPz9fng" height="344" width="425" Source: []
 * Deadweight-Loss
 * This is caused when **socially efficient quantity is found where the demand curve and the marginal-cost curve intersect**
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Because a monopoly sets its price above marginal cost, it places a **wedge between the consumer’s willingness to pay and the producer’s cost**.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">This wedge causes the quantity sold to fall short of the social optimum. <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">The Inefficiency of Monopoly
 * DWL triangle
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">The monopolist produces //less than// the socially efficient quantity of output.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">The deadweight loss caused by a monopoly is **similar to the deadweight loss caused by a tax.**
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';"> <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; msobidifontfamily: Symbol; msofareastfontfamily: Symbol; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">Problem arises because the firm **produces and sells a quantity of output below the level that maximizes total surplus**
 * <span style="color: #008000; font-family: Arial,Helvetica,sans-serif; font-size: 160%; msobidifontfamily: 'Times New Roman';">
 * Increasing Competition with Antitrust Laws
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Antitrust laws are a collection of statutes aimed at curbing monopoly power.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Antitrust laws give government various ways to promote competition. <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">They allow government to prevent mergers.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">They allow government to break up companies.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">They prevent companies from performing activities that make markets less competitive. <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Two Important Antitrust Laws <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';"> include:
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Sherman Antitrust Act (1890) <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 24.0pt; mso-fareast-font-family: 'Times New Roman';">
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 24.0pt; mso-fareast-font-family: 'Times New Roman';">Reduced the market power of the large and powerful “trusts” of that time period. <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';"> <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; msobidifontfamily: Symbol; msofareastfontfamily: Symbol; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Clayton Act (1914)
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 24.0pt; mso-fareast-font-family: 'Times New Roman';">Strengthened the government’s powers and authorized private lawsuits.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 24.0pt; mso-fareast-font-family: 'Times New Roman';">Regulation <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt; mso-fareast-font-family: 'Times New Roman';">Government may regulate the prices that the monopoly charges.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">The allocation of resources will be efficient if price is set to equal marginal cost.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">In practice, regulators will allow monopolists to keep some of the benefits from lower costs in the form of higher profit, a practice that requires some departure from marginal-cost pricing.
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">Public Ownership
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">Rather than regulating a //natural monopoly// that is run by a private firm, the government can run the monopoly itself (e.g. in the United States, the government runs the Postal Service).
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">Doing nothing
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 32.0pt;">Rather than regulating a //natural monopoly// that is run by a private firm, the government can run the monopoly itself (e.g. in the United States, the government runs the Postal Service).
 * It can increase the monopolist’s profits.
 * It can reduce deadweight loss
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Movie ticket
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Airline prices
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Discount coupons
 * <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';"> <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Financial aid
 * <span style="font: 7pt 'Times New Roman'; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings; msobidifontfamily: Wingdings; msofareastfontfamily: Wingdings; msolist: Ignore;"> <span style="color: black; font-family: Arial; mso-bidi-font-family: 'Times New Roman'; mso-bidi-font-size: 28.0pt; mso-fareast-font-family: 'Times New Roman';">Quantity discounts