Chapter 24 Monopoly
I. Introduction
II. Most Monopolies Make a Profit
.
III. Some Monopoly Do Not Make a Profit.
IV. Some Monopolies are Regulated.
 
V Dead Weight Loss
VI. Economic Analysis of Monopoly

Please 

 

I. Introduction
   A. Part II Product and Factor Markets
gives an overview of micro Markets
   B. Our Political Economy Controversies has an interesting economics section.

     C. A monopoly exists when one firm has continued control over a unique market.
        1. By controlling supply and therefore price, a monopoly may earn high economic profit.
        2. Continued existence presupposes barriers which restrict market entry of competition.
   D. Barriers to entry
       1. Economies of scale require
           a. Large initial capital investment
           b. Large R & D expenditures
       2. Ownership of raw material, strategically located land, etc.
       3. Patents and copyrights
       4. Unfair competition
       5. Natural barriers to entry lead to natural monopolies.
           a. Economies of scale can be so large that more than one producer is illogical.
           b. Natural monopolies reduce duplication, waste, and confusion.
           c. Natural monopolies are often privately owned and publicly regulated.
           d. Example: public utilities
           e. 1980's and 1990's deregulation decreased the importance of natural monopolies.

 

 

II. Most Monopolies Make a Profit.
    A. ATC includes normal return on investment.
    B. MC cuts ATC at lowest point.
    C. Profit is maximized by producing a quantity and charging a price
         indicated by the intersection of MC and MR.
    D. The resulting profit is not a payment for enterprise, it is economic

         rent which should not exist in pure capitalism.
         1. Economic Rent
         2. Rent Seeking
         3. Economic Rent Video 7:47
    E. High inelastic demand will result in a higher price, greater profit,
        and more restricted (smaller) quantity.
 

Check out AP Microeconomics Review Materials!

III. Some Monopolies
     Make No Profit.
 
            A. Rising costs and shrinking
          demand may result in a
           monopoly not making a
           profit.  
     B. When this happens, demand
          (average revenue) is always 
          below the ATC and a loss
          results.

C. AP Microeconomics Review

IV. Some Monopolies are Regulated.
   
      A. If demand is inelastic, profit may be excessive.
        B. Price Discriminating Monopoly 

                     Micro in 60 seconds
        C. Government regulates with antitrust laws,
            government ownership, and limiting profit by
             restricting price to ATC.
       D. M is the where monopoly maximizes profits.
       E. Regulated price R yields a normal return.
       F. E is the economically optimum price. 

         G. Econ in 60 Seconds Video: 
                       Regulating a Monopoly

 
V Dead Weight Loss
     
A. Econ in 60 Seconds
Video Monopoly and Dead Weight Loss
    
B Dead Weight Loss- Key Graphs of Microeconomics in 60 Seconds

       C. From Wikipedia

 

VI. Economic Analysis of Monopoly
     A. With pure competition
       1. P = MR = MC 
        2. Production is at the lowest point on ATC curve.
   B. With Monopoly  
       1. P > MR = MC
       2. Production is not at the lowest point indicated by the ATC curve 
       3. Quantity produced is restricted.
   C. A monopoly is a price maker.
       D. Are monopolies inefficient
       1. There are many inefficiencies.
           a. Lack of competition makes monopolies wasteful as there is nothing
               to force efficiency.
           b. Advertising just to enhance barriers to entry.
           c. Litigate to protect monopoly power
           d. Active politically to protect monopoly power
       2. Large scale efficiencies
           a. Bigness creates efficiencies (economies of scale) causing the ATC curve
               to be below that of pure competition.
           b. Creates the necessary profit and profit potential required for investors to
               assume the risk associated with large capital investment requirements
               including ever-increasing R & D expenditures.
   E. Additional Materials
       1. When Monopoly Wasn't A Game
       2.
2012 AP Econ Video-We're a Monopoly, Arab Money
                3. Big 2002 recording stars exhibit monopoly power. from The Big Picture 
           Paul McCartney, $103.3 million
           The Rolling Stones, $87.9 million
           Cher, $73.6 million
           Billy Joel/Elton John, $65.5 million
           Dave Matthews Band, $60.1 million
           Bruce Springsteen & the E Street Band, $42.6 million
           Aerosmith, $41.4 million
           Creed, $39.2 million
           Neil Diamond, $36.5 million
           The Eagles, $35.4 million

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