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UA EC 110 - Monopolies
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ECON 110Lecture 22Outline of Last Lecture I. Exam Detailsa. Detailsb. Overview of Chapters 13 and 14II. Clicker QuestionIII. Competitive Markets SummaryIV. Shut-down DecisionV. Profit Equations Outline of Current Lecture I. Monopolies Defineda. Price-Makersb. Limitationsc. CausesII. Barriers to Entrya. Monopoly Resourcesb. Government Regulationc. The Production ProcessIII. Maximization Equationsa. Maximum Quantityb. Maximum Revenuec. Maximum Profitd. Maximum Social WelfareCurrent Lecture – Chapter 15: MonopoliesMonopolies are the sole sellers of a product with no close substitutes. This means that they are price-makers rather than price-takers. This means that they face a downward sloping demand curve, and that the marginal revenue curve will always be bellow the demand curve. They will always aim to maximize profit, but they are not unlimited, because there will still be prices that no one would pay. (For example, Microsoft should not charge $1000 for Windows 8, because no one would be willing to pay that. Instead, consumers would use another OS or stop using computers or create their own OS.) The fundamental cause of a monopoly is a Barrier to Entry, which has three basic forms:1. Monopoly resources: the monopoly owns all of a resource to sell, or a resource that is key in making the product.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. Government Regulation: The government can give exclusive production rights to a firm (e.g. a patent). 3. The Production Process: One firm produces at a lower output than all the others. This is what’s called a Natural Monopoly. Monopolies will always produce where demand is elastic because that is where profits are maximized. - If they desire to sell the largest quantity without losing money, they must sell where the price equals the average total cost. (P = ATC)- If they desire to maximize revenue, the marginal revenue must equal zero. (MR = 0)- If they desire to maximize profit, the marginal cost must equal the marginal revenue (MC = MR ).- In order to maximize social welfare, the marginal cost must equal the price. (MC = P)NOTE: Monopolies are less efficient than perfectly competitive markets, since monopolies restrict


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UA EC 110 - Monopolies

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