Monopoly Essay

697 words - 3 pages

MONOPOLY

BRAINSTORM
WORDS AND IDEAS

PERFECT COMPETITION

MONOPOLY

PERFECT COMPETITION VS. MONOPOLY

MONOPOLY

MONOPOLY

Raw
materials
and inputs
Restricted
ownership

Sunk costs
Location
Economies
of scale

SOURCES OF MONOPOLY
POWER

Government
restrictions

CHAPTER 15

Cost

Average
total
cost
0

Quantity of Output

ECONOMIES OF SCALE

  Natural monopolies

!

MONOPOLY

319

Figur e 15-1

E CONOMIES OF S CALE AS A
C AUSE OF M ONOPOLY. When a
firm’s average-total-cost curve
continually declines, the firm
has what is called a natural
monopoly. In this case, when
production is divided among
more firms, each firm ...view middle of the document...

(b) Monopolist with Perfect Price Discrimination

(a) Monopolist with Single Price
Price

Price
Consumer
surplus
Monopoly
price

Deadweight
loss

Profit

Profit

Marginal cost

Marginal cost
Marginal
revenue

0

Quantity sold

Quantity

Demand

0

Quantity sold

Quantity

W ELFARE WITH AND WITHOUT P RICE D ISCRIMINATION . Panel (a) shows a monopolist
that charges the same price to all customers. Total surplus in this market equals the sum of
profit (producer surplus) and consumer surplus. Panel (b) shows a monopolist that can
perfectly price discriminate. Because consumer surplus equals zero, total surplus now
DISCRIMINATION firm’s profit. Comparing these two panels, you can see that perfect price
equals the discrimination raises profit, raises total surplus, and lowers consumer surplus.

PRICE

Demand

PERFECT COMPETITION, MONOPOLY, AND
EFFICIENCY

Because a monopoly exerts its market power by charging a price above
marginal cost, it places a similar wedge. In both cases, the wedge causes the quantity sold to fall short of the social optimum. The difference between the two cases
is that the government gets the revenue from a tax, whereas a private firm gets...

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