Monopoly·.pptVIP

* * * * * * Monopoly 2012 by WUYANGHOUJIABIN Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly A firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes. Consider a simple model of market power One seller, multiple buyers Buyers act as price-takers Seller determines price Why Monopolies Arise The fundamental cause of monopoly is barriers to entry. barriers to entry A barrier to entry is anything that prevents entry when entry is socially beneficial Why Monopolies Arise Barriers to entry have three sources: Ownership of a key resource. The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number of producers. Monopoly Resources Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason. Government-Created Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. Government-Created Monopolies Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest. Natural Monopolies An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. Natural Monopolies A natural monopoly arises when there are economies of scale over the relevant range of output. Economies of Scale as a Cause of Monopoly... Average total cost Quantity of Output Cost 0 Monopoly versus Competition Monopoly Firm Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales Competition versus Monopoly Competitive Firm Is one of many producers Has a horizontal demand curve Is a price taker Sells as much or as little at same price Example about monopoly in China Salt co