ECON 1 Lecture Notes - Lecture 14: Deadweight Loss, De Beers, Natural Monopoly
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#14 Thursday 3/8 (Ch.15 Monopolistic Markets)
Definition
A monopolist
● Is the sole seller of a product without substitutes
○ A competitive firm competes with many others selling the same good
● Has market power: it can influence market price
○ A competitive firm is a price-taker
● Charges a price higher than MC → deadweight loss (makes society worse off, government controls it
through laws and regulations)
○ A competitive firm charges P = MC
Why Monopolies Arise
Barriers to entry—other firms cannot enter the market.
1. A single firm owns a key resource.
E.g., DeBeers owns most of the world’s diamond mines
2. The government gives a single firm the exclusive right to produce the good.
E.g., patents, copyright laws (the only case where monopolies are good for society)
3. Natural monopoly: a single firm can produce the entire market Q
at lower cost than could several
firms.
Example: 1000 homes need electricity
ATC is lower if one firm services all 1000
homes than if two firms each service 500
homes
4. Network externality: e.g. social media, no one wants to be on the social media before their friends, hard
for new social media platforms to get new users
Monopolist’s MR
● To sell a larger Q
, the monopolist must
reduce the price on all the units it sells.
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Document Summary
Is the sole seller of a product without substitutes. A competitive firm competes with many others selling the same good. Has market power : it can influence market price. Charges a price higher than mc deadweight loss (makes society worse off, government controls it. A competitive firm is a price-taker through laws and regulations) A competitive firm charges p = mc. Barriers to entry other firms cannot enter the market: a single firm owns a key resource. E. g. , debeers owns most of the world"s diamond mines: the government gives a single firm the exclusive right to produce the good. E. g. , patents, copyright laws (the only case where monopolies are good for society) firms: natural monopoly : a single firm can produce the entire market q at lower cost than could several. To sell a larger q , the monopolist must reduce the price on all the units it sells.