Chapter+15+MONOPOLY+JennY


 * Monopoly:** A firm that is the one and only seller of a product in a market without substitutes.
 * Natural Monopoly:** A monopoly that rises when a firm can supply a good or service to the market at a smaller cost compared to other firms.
 * Price Discrimination:** The business practice of selling a good at different prices to different customers.

=Summary= A monopoly is a firm that is the only seller in a market. It arises when a firm has a smaller cost to produce a product compared to other firms. It creates deadweight loss. It produces the quantity at which marginal revenue equals marginal cost. Then the monopoly chooses the price at which that quantity is demanded. A monopolist's profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.

=media type="youtube" key="b93mTVukuiE" height="295" width="480"= http://kr.youtube.com/watch?v=b93mTVukuiE

=Why Monopolies Arise=
 * A key resource is owned by a single firm
 * The government gives a single firm the exclusive right to produce some good or service.
 * The costs of production make a single producer more efficient than a large number of producers.

Monopoly Resources: It is easy for a company to be a monopoly when it owns a key resource. The monopolist has much greater market power than any single firm in a competitive market because it has an exclusive ownership.

Government-Created Monopolies: Government-created monopolies arise when the government has given one person or firm the exclusive right to sell some good or service. Through the patent and copyright laws, the government creates a monopoly to serve the public service. The patent and copyright laws promote monopoly producers to charge higher prices and earn higher profits. They increase incentives for creative activity.

Natural Monopolies: A natural monopoly arises when there are economies of scale over the relevant range of output. Normally, a firm has trouble maintaining a monopoly position without ownership of a key resource or protection from the government. http://economicobjectorvism.files.wordpress.com/2007/07/natural-monopoly.jpg When a firm's average-total-cost curve declines, it is in a natural monopoly. When production is divided among more firms, each firm produces less, and average total cost rises. As a result, a single firm can produce any given amount at the smallest cost. When a firm is a natural monopoly, it is less concerned about new entrants eroding its monopoly power. The monopolist's profit attracts entrants into the market, and these entrants make the market more competitive. By contrast, entering a market in which another firm has a natural monopoly is unattractive. Would-be entrants know that they cannot achieve the same low costs that the monopolist enjoys because after entry, each firm would have a smaller piece of the market.

=How Monopolies Make Production and Pricing Decisions= Monopoly versus Competition:
 * A competitive firm is small relative to the market in which it operates and, therefore, ahs no power to influence the price of its output. It is a price taker. however, a monopoly is the sole producer in its market that it can alter the price of tis good by adjusting the quantity it supplies to the market. It is a price maker.
 * Because the competitive firm sells a product with many perfect substitutes, the demand curve is perfectly elastic. By contrast, a monopoly is the sole producer in its market that is demand curve is the market demand curve. Why If the monopolist raises the price of its good, consumers buy less of it.

A Monopoly's Revenue: A monopolist's marginal revenue is always less than the price of its good because it faces a downward-sloping demand curve. When a monopoly increases the amount it sells, it bring two effects on the total revenue (PXQ); the output effect, and the price effect. The output effect is that more output is sold, so Q is higher. The price effect is the price falls, so P is lower. When a monopoly increases production by 1 unit it must reduce the price it charges for every unit it sells, and this cut in price reduces revenue on the units it was already selling. As a result, a monopoly's marginal revenue is less than its price. Marginal revenue is negative when the price effect on revenue is greater than the output effect. In this cae, when the firm produces an extra unit of output, the price falls by enough to cause the firm's total revenue to decline, even though the firm is selling more units.

Profit Maximization: A monopoly maximizes profit by choosing the quantity at which marginal revenue equals marginal cost. It then uses the demand curve to find the price that will induce consumers to buy that quantity. http://www.economics.utoronto.ca/osborne/2x3/tutorial/MONF2.GIF The monopolist's profit-maximizing quantity of output is determined by the intersection of the marginal revenue curve and the marginal-cost curve. Then the monopoly chooses the quantity of output that equates marginal revenue and marginal cost. It uses the demand curve to find the price consistent with the quantity. For a competitive firm: P=MR=MC For a monopoly firm: P>MR=MC

A Monopoly's Profit:
http://tutor2u.net/economics/content/diagrams/monopolyprofits1.gif (P1 - ATC1) X (Q1 - ATC1) = Profit of the monopoly firm
 * Profit = TR - TC
 * Profit = (TR/Q - TC/Q) X Q
 * Profit = (P - ATC) X Q

=The Welfare Cost of Monopoly= The Deadweight Loss: A benevolent social planner who wanted to maximize total surplus in the market would choose the level of output where the demand curve and marginal-cost curve intersect. Below this level, the value of the good to the marginal buyer exceeds the marginal cost. Above this level, the value to the marginal buyer is less than marginal cost. http://upload.wikimedia.org/wikipedia/en/thumb/e/ef/Monopoly-surpluses.svg/300px-Monopoly-surpluses.svg.png Because the market demand curve describes a negative rleationship between the price and quantity of the good, a quantity that is inefficiently low is equivalent to a price that is inefficiently high. When a monopolist charges a price above marginal cost, some potential consumers value the good at more than its marginal cost but less than the monopolist's price. These consumers do not end up buying the good. Because the value these place on the good is greater than the cost of providing it to them, this result is inefficient. Thus monompoly pricing prvents some mutually beneficial trades from taing place. The inefficiency of monopoly can be measured with a deadweight loss triangle. Because the demand curve reflects the value to consumers and the marginal-cost curve reflects the costs to the monopoly producer, the area of teh deadwieght loss triangle between the demand curve and the marginal-cost curve equals the total surplus lost because of monopoly pricing. It is reduction in economic well-being that results from the monopoly's use of its market power. media type="youtube" key="Uyq7srTy7Zg" height="344" width="425" http://kr.youtube.com/watch?v=Uyq7srTy7Zg

=The Monopoly's Profit: A Social Cost?= The problem of monopoly derives from the inefficiently low quantity of output because in a monopolized market, the firm produces and sells a quantity of output below the level that maximizes total surplus. This is why it creates the deadweight loss and the economic pie shrinks as a result

=Public Policy Toward Monopolies= > =Price Discrimination= There are three lessons that price discrimination teach.
 * 1) Increasing Competition with Antitrust Laws: The government uses antitrust laws over private industry to prevent monopolies, mergers, breaking up up companies. The laws also makes the market less competitive.
 * 2) Regulation: The government regulates the behavior of monopolists. One might conclude that the price should equal the monopolist's marginal cost, but two problems rise. The first arises from the inexorable logic of cost curves. Because a natural monopoly has declining average total cost, marginal cost is less than average total cost. Therefore if regulators require a natural monopoly to charge a price equal to marginal cost, price will be below average total cost, and the monopoly will lose money. One way for this problem is to subsidize the monopolist or charge a price higher than marginal cost. The second problem with marginal-cost pricing as a regulatory system is that it gives the monopolist no incentive to reduce costs.
 * 3) Public Ownership: The government can run the monopoly itself without regulating a natural monopoly. However, the issue is how the ownership of the firm affects the costs of production. Private owners have an incentive to minimize costs as long as they reap apart of the benefit in the form of higher profit. If the firm's managers are doing a bad job of keeping costs down the firm's owners will fire them. However, if the government bureaucrats who run a monopoly do a bad job, the losers are the customers and taxpayers, whose only recourse is the political system. The bureucrats may become a speical-interest group and attempt to block cost-reducing reforms.
 * 4) Doing nothing: Each of the foregoing policies aimed at reducing the problem of monopoly has drawbacks. As a result, some economists argue that it is often best that it is often best for the government not to try to remedy the inefficiencies of monopoly pricing.
 * 1) The price discrimination is a rational strategy for a profit-maximizing monopolist.
 * 2) It requires the ability to separate customers according to their willingness to pay. For example, price discrimination can prevent arbitrage, the process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference.
 * 3) Price discrimination can raise economic welfare.

Examples of Price Discrimination: movie tickets, airline prices, discount coupons, financial aid, quantity discounts

media type="youtube" key="qdRGUaTHVig" height="344" width="425" http://kr.youtube.com/watch?v=qdRGUaTHVig

Questions Answers for Chapter 15 JennY
 * 1) Give one example of price discrimination and explain.
 * 2) Can monopolists earn profit in long run?