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Pure Monopoly

Pure Monopoly. Chapter 11. Monopoly. Characteristics: Single seller No close substitutes Price maker Blocked entry Nonprice competition. Examples of Monopoly. Examples are relatively rare Government owned or regulated utility companies These are called natural monopolies.

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Pure Monopoly

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  1. Pure Monopoly Chapter 11

  2. Monopoly • Characteristics: • Single seller • No close substitutes • Price maker • Blocked entry • Nonprice competition

  3. Examples of Monopoly • Examples are relatively rare • Government owned or regulated utility companies • These are called natural monopolies

  4. Barriers to entry • Factors that prohibit firms from entering an industry are called barriers to entry.

  5. Economies of Scale • Serves as an entry barrier in a pure monopoly • New firms are unable to realize the cost savings of a monopolist

  6. Legal Barriers to Entry • Patents • Licenses

  7. Patents • Exclusive right of an inventor to use their invention for 20 years without competition • This serves as a reward for developing a product that is in demand

  8. Licenses • Government limits entry into an industry through licensing • i.e. the federal communications commission only allows so many radio & t.v. stations in a specific area

  9. Monopoly Demand • Demand curve • Down sloping appearance • Supply curve for firm and industry is same thing since there is only one firm

  10. MR<Price • Sales can only increase by charging a lower price • Lower price applies not only to the extra output sold but also to all prior units of output

  11. Price Maker • Price is determined by how many products they want to sell • Price is set in the “elastic” portion of the demand curve

  12. Output & Price Determination • Cost Data • Still competes for resources • Employs same technology as pc firm • MR=MC Rule -Profit-Maximizing Point • Same as competitive industry

  13. Misconceptions • Not highest price • Total, not unit, profit • Possibility of losses by a monopolist

  14. Simultaneous consumption • A product’s ability to satisfy a large number of consumers at the same time.

  15. X-Inefficiency • Occurs when a firm’s actual cost of producing any output is greater than the lowest possible cost of producing it.

  16. Rent-Seeking Behavior • Ability to earn rent on a resource that you own • If your competitor has to have the resource, they have no alternative to buy it from you.

  17. Price Discrimination • The practice of selling a specific product at more than one price when the price differences are not justified by cost differences.

  18. Conditions • Price discrimination is possible when the following conditions are realized. • Monopoly power • Market segregation • No resale

  19. Socially optimal price • Price that achieves allocative efficiency • Government establishes a price ceiling to prevent firms from taking advantage of consumers

  20. Fair-Return Price • Socially optimal prices may lead to losses by a firm • The fair-return price should fall on the firm’s ATC curve

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