Chapter+15+(JEM)+-+Monopoly

Monopoly is another type of market that is on the other side of the line from perfect competition. So, it has very opposite characteristics: - price maker - one firm - sunk cost (barriers to entry) - dead weight loss

Price taker simply means that monopolist firm, unlike perfectly competitive firms, can set the price level of its products because it is the only firm in the market, and people have no choice but to buy the products from that company only.

The reason why such phenomenum occurs is because of the barriers to entry. 1. a key resource is owned by a single firm 2. government has given a firm the exclusive right to sell some good or service. 3. higher efficiency to have a single firm to supply the entire market - natural monopoly

Also, unlike competitive firms, since monopolistic firm is the only firm in the market, the market demand is the monopolist's demand curve, P=AR. However, the marginal revenue is always less than the price of its good. The profit maximization point is the same as a competitive firm: where MR=MC.

As you see, when MR curve intersects with MC curve, the price is not taken at that level but the point on the demand curve at that quantity.

Profit = TR - TC Profit = (TR / Q - TC / Q) X Q Profit = (P - ATC) X Q

Although the profit maximization point is where MR=MC, it is not the socially efficient point, because their is the opportunity cost that equals the triangle between Quantity, Demand, and MC curve. This is called dead weight loss.

Also, there is price discrimination in monopoly. Firms sell the products at different prices for different groups of people because each group has different demand for that product. Some of its examples include:- Movie tickets- airline prices- discount coupons- financial aids

1. Antitrust laws- having a monopoly would decrease the competition and a lot of small firms will not be able to compete. By applying antitrust laws, firms were limited in creating a monopoly, and competition is restored in the market. 2. Regulation - Because firms can set their own price for the product, the government would regulate the price. A dilemma that arouses from this is that if the price is above the price, than the firms would just exit the market. 3. Public ownership - government runs its own monopoly such as telephone, water, postal service, etc. 4. Doing nothing - There are problems and drawbacks in regulating monopolies, so some economists suggests that just doing nothing is the best.
 * Public Policy Towards Monopoly**

The video below summarizes the chapter. media type="youtube" key="pJmdNBsvGMQ" height="344" width="425"

Questions: 1. Compare and contrast monopoly and perfect competition. 2. How does a monopolistic firm maximize its profit? 3. What makes monopolies socially inefficient?

Answers: 1. Unlike competitive firms, monopolists are price makers because they are the only firm in their market. Also, there are barriers to entry in monopolistic markets. 2. MR=MC 3. There is the deadweight loss where monopolies maximizes its profit.