ITM 207 Lecture Notes - Lecture 10: Fixed Cost, Marginal Cost, Perfect Competition
9 May 2018
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ENC102 Chapter 11 Notes
- A monopoly is referred as a natural monopoly if the market demand curve intersects the
long run ATC curve at any point where average total cost is declining.
- Legal barriers to entry: patents and licences
o Patents: is an exclusive right of an inventor to use, or to allow another to use, her
or his invention.
▪ These laws protect monopolies from rivals.
▪ The patent extends to 20 years after the application.
▪ Patents are self-sustaining for businesses.
o Licences: a government issued limitation of entry into an industry or occupation.
▪ Some occupations require licenses, like cabs, therefore it creates an
economic profit for cab owners.
- Ownership of essential resources:
o Monopolistic organizations may own most of the resources used to create their
product, therefore new firms entering the market will find it hard to produce their
product.
- Pricing and other strategic barriers of entry:
o Monopolies may slash prices and increase advertising to diminish the power of
the rival firms. They also may increase the price of the necessary resources to
create their product, if they hold most it.
- Monopoly Demand:
o Economies of scale, patents, or resource ownership secure the monopolists status.
o Government does not regulate the firm.
o The firm is a single price monopolist; it charges the same price for all units of
output.
o The difference between a monopoly and the seller at a perfect competition, is the
demand curve.
▪ In a perfect competition the seller can sell as much or as little of the
product they want at the market price.
▪ Monopolies set the market price because they are the industry, which
means the individual demand curve is the industry demand curve.
o Marginal revenue is less than price:
▪ Monopolies can only increase sales by reducing prices. This is successive
for all units prior to your unit of production,
• For example, for the firm to sell 4 units rather than 3 units, they
will have to decrease their price from $142 to $132 per unit.
▪ Every marginal revenue is less then the price except for the first unit,
because marginal revenue is the difference in each successive unit. As the
marginal revenue decreases, total revenue is increasing at a diminishing
rate.
▪ Marginal revenue is the difference in total revenue, therefore when the
marginal revenue is equal to 0, the firm has reached its highest total
revenue. If the marginal revenue is a negative, the total revenue is
decreasing.
o The monopolist us a price maker:
find more resources at oneclass.com
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Document Summary
A monopoly is referred as a natural monopoly if the market demand curve intersects the long run atc curve at any point where average total cost is declining. Ownership of essential resources: economic profit for cab owners: monopolistic organizations may own most of the resources used to create their product, therefore new firms entering the market will find it hard to produce their product. Pricing and other strategic barriers of entry: monopolies may slash prices and increase advertising to diminish the power of the rival firms. They also may increase the price of the necessary resources to create their product, if they hold most it. As the marginal revenue decreases, total revenue is increasing at a diminishing rate: marginal revenue is the difference in total revenue, therefore when the marginal revenue is equal to 0, the firm has reached its highest total revenue.
