Econ 2023 1st Edition Lecture 14 Outline of Last Lecture I. New material starts on this lecture.Outline of Current Lecture II. Monopoly a. Market powerb. Legal MonopoliesIII. Efficiency Current Lecture1. Monopoly--"Definition: A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. Description: In a monopoly market, factors like government license, ownership of resources, copyright and patent and high starting cost make an entity a single seller of goods. All these factors restrict the entry of other sellers in the market."2. Market power--"...the ability of a firm to profitably raise the market price of a good or service over marginal cost." With P > MC, there is allocative inefficiency. The extra utility that consumers would receive from an additional unit of output, as captured by price, exceeds the extra cost of producing an extra unit of output. Thus, the monopolist is producing level than thesocially optimal level of output, where P = MC (allocative efficiency). A monopolist restricts output below the optimal level, raising price, because doing so maximizes its profit.3. Barriers to entry--Anything that allows incumbent firms to earn above-normal profits (π > 0) without attracting entry. (Note: Not all economists are on what constitutes a barrier to entry.)4. Natural monopoly--"A situation in which one company is able to supply the whole market for a product or service more cheaply than two or more companies could." Water, electric, and gasutilities are natural monopolies. Natural monopolies arise when economies of scale are extensive relative to the size of the market:5. Legal monopoly--"A situation in which a government gives the right to provide particular goods or services to one company."a. Patent--"A government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time. Applications for patents are usually handled by a government agency. In the U.S. the United States Patent and Trademark Office handles application and documentation. ... In the United States most patents are valid for 20 years. By granting the right to produce a new product without 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.fear of competition, patents provide incentive for companies or individuals to continue developing innovative new products or services. For example pharmaceutical companiesspend large sums on research and development and patents are essential to earning a profit."b. Trademark (™)--"A trademark is any word, name, symbol, or design, or any combination thereof, used in commerce to identify and distinguish the goods of one manufacturer or seller from those of another and to indicate the source of the goods. ...shapes, sounds, fragrances and colors may also be registered as trademarks."c. Copyright (©)--"The exclusive right to make copies, license, and otherwise exploit a literary, musical, or artistic work, whether printed, audio, video, etc.: works granted suchright by law on or after January 1, 1978, are protected for the lifetime of the author or creator and for a period of 50 years after his or her death."6. Predatory pricing--Predatory pricing (also undercutting) is a pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The predatory merchant then has fewer competitors or is even a de facto monopoly.7. Efficiency--"...the extent to which time, effort, or cost is well-used for the intended task or function. It often comprises specifically the capability of a specific application of effort to produce a specific outcome effectively with a minimum amount or quantity of waste, expense, or unnecessary effort." In markets, "overall efficiency" has two constituent elements:a. Productive efficiency--"Productive efficiency occurs when the equilibrium output is supplied at minimum average cost. This is attained in the long run for a competitive market." I.e., productive efficiency exists when P* = Minimum ATCLong Run. NOTE: Productive efficiency is a phenomenon found in long run competitive market equilibrium.b. Allocative efficiency--"...occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences. A more precise definition of allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production. This is because the price that consumers are willing to pay is equivalent tothe marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost." I.e., allocative efficiency existswhen P* = MC. NOTE: Allocative efficiency holds under both short run and long run competitive market