Editors Notes: A.
Part II Product and Factor Markets should be read as an introduction to this
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has an interesting economics
A. 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
B. Barriers to entry
Economies of scale require
Large initial capital investment
Large R & D expenditures
2. Ownership of
raw material, strategically located land, etc.
3. Patents and
barriers to entry lead to natural monopolies.
Economies of scale can be so large that more than one
producer is illogical.
Natural monopolies reduce duplication, waste, and confusion.
Natural monopolies are often privately owned and publicly regulated.
Example: public utilities
Deregulation in the 1980's and 1990's decreased the importance of natural
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
by the intersection of MC and MR.
D. The resulting profit is not a payment for enterprise, it is economic
E. High inelastic demand will result in a higher price, greater profit,
more restricted (smaller) quantity.
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III. Some monopoly companies sell at a loss.
A. Rising costs and shrinking demand may
a monopoly not making a
B. When this happens, demand (average
revenue) is always below the ATC and
a loss results.
IV. Some monopolies need to be regulated.
A. If demand is inelastic, profit may be
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C. Government regulates with antitrust laws,
ownership, and limiting profit
by restricting price to ATC.
D. M is the price where monopoly maximizes
E. R is regulated price where a normal return is
F. E is the economically optimum price.
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|IV. Dead Weight Loss
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C. From Wikipedia
V. 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.
VI. Are monopolies inefficient
A. There are many inefficiencies.
1. Lack of competition makes monopolies wasteful as there is nothing to force
2. Advertising just to enhance barriers to entry.
3. Litigate to protect monopoly power
4. Active politically to protect monopoly power
B. Large scale efficiencies
1. Bigness creates efficiencies (economies of scale) causing the
ATC curve to be below that of pure competition.
2. Creates the necessary profit and profit potential required for investors to
assume the risk associated with large
investment requirements including ever-increasing R & D expenditures.
Know Much About History Book Summary, Chapter 5 When Monopoly Wasn't A Game.
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VIII. Other Information from The Big Picture
Big recording stars exhibit monopoly power.
B. Here's a rundown of 2002's
according to Pollstar:
1. Paul McCartney, $103.3 million
2. The Rolling Stones, $87.9 million
3. Cher, $73.6 million
4. Billy Joel/Elton John, $65.5 million
5. Dave Matthews Band, $60.1 million
6. Bruce Springsteen & the E Street Band, $42.6 million
7. Aerosmith, $41.4 million
8. Creed, $39.2 million
9. Neil Diamond, $36.5 million
10. The Eagles, $35.4 million