UA EC 110 - Monopolies (2 pages)

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The beginning of Chapter 15

Lecture number:
Lecture Note
University of Alabama
Ec 110 - Prin of Microeconomics
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ECON 110 Lecture 22 Outline of Last Lecture I Exam Details a Details b Overview of Chapters 13 and 14 II Clicker Question III Competitive Markets Summary IV Shut down Decision V Profit Equations Outline of Current Lecture I II III Monopolies Defined a Price Makers b Limitations c Causes Barriers to Entry a Monopoly Resources b Government Regulation c The Production Process Maximization Equations a Maximum Quantity b Maximum Revenue c Maximum Profit d Maximum Social Welfare Current Lecture Chapter 15 Monopolies Monopolies 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 output

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