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OU ECON 1123 - The Theory of Pure Monopoly

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ECON 1123 1st Edition Lecture 15 Outline of Last LectureI. Cost IndustriesII. Pure Competition ConclusionsOutline of Current LectureI. The theory of pure monopolyA. Characteristics of Pure MonopolyB. Monopoly ProfitsCurrent LectureI. The theory of pure monopolyA. Characteristics of Pure Monopoly-A single seller of a good or service with no close substitutesIt CONTRASTS pure competition: many seller and homogeneous products. -Monopolists try to maximize profits or minimize losses by following the rule: marginal revenue = marginal cost-In monopoly, the firm and industry are identical. So, the monopolist faces the market (industry demand curve)This CONTRASTS pure competitions horizontal demand schedule at some price. The firms in pure competition take the price the market gives them. In pure completion, marginal revenue and demand will beequal-In monopoly, demand does not equal marginal revinueNote: If the monopolist charges a uniform price for all output units, then each time an additional unit is sold, total revenues increases by something less than the price charged for the unitWhy would total revenue not increase by the full price paid for the last unit sold? Because, to sell the last unit, the monopolist had to lower price on that unit AND lower price on all other units.Monopolist gains Total revenue=last unit’s price, but loses some revenue of all other unitsMyth: monopolies are always profitable. – Monopolies don’t necessarily always make profits if the demand for their good is lowB. Monopoly ProfitsThese 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.Monopoly profits generally depend on monopoly price and average total cost (ATC)Consider two possibilities:-If the ATC curve is tangent to the demand schedule, there will be no incentive for monopolist to exit. Here they will have zero economic profits because under these circumstances total revenue= total cost-If ATC is under the demand schedule then the firm will be making positive economic profits and there will be strong incentives for new entrants to reap the high monopoly profitsBUTThere are barriers to entry for firms such asLegal Barriers:Patents, Trademarks, LicensesNatural Barriers:Economies of scale (bigger firms have lower average costs than smaller


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