6355 Lecture Notes - Lecture 6: Deadweight Loss, Perfect Competition, Rent-Seeking
5 Jun 2018
School
Department
Course
Professor
Monopoly: the only seller of a good or service that does not a close substitute.
• High barriers to entry
• Usually economic profit in both the short run and the long run
Monopolies arise because of a lack of competition created by barriers to entry.
The main reasons for high barriers to entry are:
• Government blocks entry of more than one firm into a market (i.e. patent, copyright)
• One firm has control of a key resource material/technology necessary to produce a good.
• There are important network externalities in supplying the good or service.
• Product differentiation and brand loyalty
• Large set-up costs
• Economies of scale are so large that one firm has a natural monopoly
Monopoly is a price maker. It does not face a horizontal demand curve.
• In fact, both its demand curve and marginal revenue curve are downward-sloping
• Marginal revenue curve is positioned below its demand curve.
An increase in production by a monopolist has two opposing effects on revenue.
• A quantity effect: one more unit is sold, increasing total revenue by the price at which the unit
is sold.
• A price effect: in order to sell the last unit, the monopolist must cut the market price on all
units sold. This decreases total revenue
Profit maximising monopolies will never produce at an output in the inelastic range of its demand
curve.
If could charge a higher price, or produce a smaller quantity, and earn a larger profit.
The monopolist's profit maximising output is determined by the intersection of the marginal
revenue curve and the marginal cost curve.
P = MR = MC
Monopolist: P > MR=MC
Profit is from where the ATC intersects the MR to where it meets the demand curve.
A monopoly in a perfectly competitive industry would produce less and charge a higher price.
Monopoly causes a reduction in consumer surplus.
Monopoly causes an increase in producer surplus.
Monopoly causes a deadweight loss, which is a reduction in economic efficiency.
Rent seeking behaviour is activity directed toward acquiring monopoly power.
Rent seeking is profitable and widely pursued.
Rent seeking is a complete loss to society since it uses resources but not does produce any output.
A natural monopoly is a situation in which economies of scale are so large that one firm can supply
the entire market at a lower average cost than can two or more firms.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Monopoly: the only seller of a good or service that does not a close substitute: high barriers to entry, usually economic profit in both the short run and the long run. Monopolies arise because of a lack of competition created by barriers to entry. It does not face a horizontal demand curve. In fact, both its demand curve and marginal revenue curve are downward-sloping: marginal revenue curve is positioned below its demand curve. Profit maximising monopolies will never produce at an output in the inelastic range of its demand curve. If could charge a higher price, or produce a smaller quantity, and earn a larger profit. The monopolist"s profit maximising output is determined by the intersection of the marginal revenue curve and the marginal cost curve. Profit is from where the atc intersects the mr to where it meets the demand curve. A monopoly in a perfectly competitive industry would produce less and charge a higher price.
