monopoly (by mason and andrew)
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By Andrew Liu and Mason Liang
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Why Monopolies Arise Key Cause: Barrier to
Entry Examples: Ownership of Key
Resource Government-created
Monopolies Low Cost of
Production for one firm
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Monopoly Resources Owning a key resource For example: owning the
only well in a small town This is very hard to
achieve because of the size of the economy
Resources are usually owned by many people
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Government-Created Monopolies Government can give
exclusive rights to a firm to sell a product or service
Patents and copyrights are good examples
They increase incentive for creative activity
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Natural Monopolies A firm has a lower cost of production than
everyone else An uncongested bridge can be a natural
monopoly
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How Monopolies Make Decisions The key quality of a monopoly is the ability to
influence price Total revenue = Quantity sold x Price Average revenue = Total revenue/Quantity (Price) Marginal revenue = ΔTotal revenue/ΔQuantity Marginal revenue is always less than the price
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Profit Maximization Profit-maximizing
quantity is where MR=MC
Price is determined by the demand curve
P > MR=MC Profit = (P-ATC) x Q
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Deadweight Loss
The efficient quantity is where D=MC; monopolies produce at MR=MC
Monopolies produces less than the socially efficient quantity of output
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Public Policy Increasing Competition with Antitrust Laws Regulation Public Ownership Doing Nothing
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Increasing Competition with Antitrust Laws Sherman Anti-Trust Act Clayton Anti-Trust Act Synergies Costs vs. Benefits
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Regulation What price should the government set it at? What are the issues with regulation?
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Public Ownership The government takes
over the monopoly
Ex: Postal Service
Problems with public ownership
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Doing Nothing Some economists argue
that government should not try to remedy the inefficiencies of monopoly pricing.
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Price Discrimination Charging different rates to different customers Reduces inefficiency Moral aspects
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Examples of Price Discrimination Movie Tickets Airline Prices Discount Coupons Financial Aid