ECON 1201 Lecture Notes - Lecture 20: Final Good, Deadweight Loss, Microsoft Powerpoint
ECON 1201 – Lecture 20 – Monopoly and Monopolistic Competition
• Graphical expression saying company is selling its goods over costs
• Company will not produce at AC’ because no matter what price is charged it is always
less than its costs
What is Monopoly?
• Sole seller of a good
• Does not have any close substitutes
• Hard to define market in which companies compete
Art vs. Science in Market Definition
• In the real world it is very difficult to tell whether or not they are a sole seller
• Depends on how you define the relevant market
• Product
o Microsoft: software or operating systems
o Mars: candy, snack or food
• Geographic
o Does Hartford Hospital compete with St. Francis? Windham Hospital?
• MR is like a shadow of the demand
curve
• Q* - profit maximizing output
• P* - profit maximizing price
• Whether or not to produce – need
average costs
• Would produce because making
economic profit
• ∏ = TR – TC
o = P x Q – AC x Q
o = (P* x AC*) Q*
Monopoly PowerPoint, Slide 7
Profits and Entry
• Earn profits over time
• The graph is a picture of monopoly this year, next year, years to come
• Why isn’t there entry?
Sources
• Institutional/legal
• Economic
“Barriers” to Entry
• The way monopolies survive is tied to the fact that there are barriers to entry
• Government blocks entry for legal reasons
• Economies of scale are so large – natural monopoly
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Document Summary
What is monopoly: sole seller of a good, does not have any close substitutes, hard to define market in which companies compete. Economic reasons: natural monopoly, economies of scale over entire relevant region of demand, no entry because incumbent can always expand production it"s costs are falling while entrant has higher costs. If two companies produced of q*, ac is higher: control over critical natural resources. If you can control input, you can control the end product: unique economic efficiencies, some companies are just better at what they do. Application: role of competition in different marketplaces, why there are cheaper airline prices for flights with further distance. Inelastic high markup: more flights from new york to seattle than dallas, new york to seattle, more carriers, more elastic, more substitutes for major routes, dallas to seattle, only one flight, airline can charge higher price.
