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Chapter 24

Monopoly

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Editors Notes:  A. Part II Product and Factor Markets should be read as an introduction to this chapter
                          
B. Our Current Events Internet Library has an interesting economics section.

I. Introduction
     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 competing firms.
     B. 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. Deregulation in the 1980's and 1990's 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.
E. High inelastic demand will result in a higher price, greater profit, and a
     more restricted (smaller) quantity.
 

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III. Some monopoly companies sell at a loss. 
     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.

IV. Some monopolies need to be regulated.
      A. If demand is inelastic, profit may be excessive.
      B.
Price Discriminating Monopoly- Key Graphs of Microeconomics in 60 seconds
      C. Government regulates with antitrust laws, government
           ownership, and limiting profit by restricting price to ATC.
      D. M is the price where monopoly maximizes profits.
      E. R is regulated price where a normal return is earned.
      F. E is the economically optimum price.

     G. Econ Concepts in 60 Seconds Video on Regulating a Monopoly Review
     H. Check out our  AP Microeconomics Review Materials!

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IV. Dead Weight Loss
     
A. Econ Concepts in 60 Seconds
Video from  Monopoly and Dead Weight Loss Review for AP Microeconomics
     
B Dead Weight Loss- Key Graphs of Microeconomics in 60 Seconds
      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 efficiency.
           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
               capital
investment requirements including ever-increasing R & D expenditures.
VII. Additional Materials
       1. Don't Know Much About History Book Summary, Chapter 5 When Monopoly Wasn't A Game
       2. 2012 AP Econ Videos- We're a Monopoly (Arab Money)

VIII. Other Information from The Big Picture

       A. 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

              

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