HUTECH Institute of International Education Competitive markets TOPIC 8 HUTECH Institute of International Education Competitive markets Introduction ▪ A monopoly is a firm that is the sole seller of a[.]
TOPIC HUTECH Institute of International Education Competitive markets Introduction ▪ A monopoly is a firm that is the sole seller of a product without close substitutes ▪ The key difference: A monopoly firm has market power, the ability to influence the market price of the product it sells A competitive firm has no market power HUTECH Institute of International Education Competitive markets Why Monopolies Arise The main cause of monopolies is barriers to entry – other firms cannot enter the market Three sources of barriers to entry: ▪ Monopoly resources ▪ Government regulation ▪ The production process HUTECH Institute of International Education Competitive markets Why Monopolies Arise ▪ Monopoly resources • A key resource required for production is owned by a single firm • Higher price ▪ Government regulation • Government gives a single firm the exclusive right to produce some good or service • Government-created monopolies - Patent and copyright laws - Higher prices; Higher profits HUTECH Institute of International Education Competitive markets Why Monopolies Arise ▪ The production process • A single firm can produce output at a lower cost than can a larger number of firms – A natural monopoly: arises when there are economies of scale over the relevant range of output HUTECH Institute of International Education Competitive markets Why Monopolies Arise – Natural monopoly Example: 1000 homes need electricity ATC is lower if firm services all 1000 homes than if two firms each service 500 homes Cost $80 Electricity ATC slopes downward due to huge FC and small MC $50 ATC 500 HUTECH Institute of International Education 1000 Q Competitive markets Monopoly versus Competition Competitive firm • Price taker • One producer of many • Demand – horizontal line (Price): P = Pmarket P Monopoly P • Price maker • Sole producer • Downward sloping demand A competitive firm’s D curve D Q A monopolist’s D curve D Q HUTECH Institute of International Education Competitive markets ACTIVE LEARNING A monopoly’s revenue Firm A is the only seller of cappuccinos in town The table shows the market demand for cappuccinos Fill in the missing spaces of the table What is the relation between P and AR? Between P and MR? HUTECH Institute of International Education Q P $4.50 4.00 3.50 3.00 2.50 2.00 1.50 TR AR MR n.a Competitive markets ACTIVE LEARNING Answers Here, P = AR, same as for a competitive firm Here, MR < P, whereas MR = P for a competitive firm HUTECH Institute of International Education Q P TR AR $4.50 $0 n.a 4.00 $4.00 3.50 3.50 3.00 3.00 2.50 10 2.50 2.00 10 2.00 1.50 1.50 MR $4 –1 Competitive markets Demand and MR Curves of Monopolist P, MR Q P $4.50 4.00 3.50 3.00 2.50 2.00 1.50 MR $4 –1 HUTECH MONOPOLY Institute of International Education $5 -1 -2 -3 Demand curve (P) MR 10 Competitive markets Q ...Introduction ▪ A monopoly is a firm that is the sole seller of a product without close substitutes ▪ The key difference: A monopoly firm has market power, the ability... barriers to entry: ▪ Monopoly resources ▪ Government regulation ▪ The production process HUTECH Institute of International Education Competitive markets Why Monopolies Arise ▪ Monopoly resources... natural monopoly: arises when there are economies of scale over the relevant range of output HUTECH Institute of International Education Competitive markets Why Monopolies Arise – Natural monopoly