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Economics - Monopoly

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Study GuideEconomics–Monopoly1. Monopoly in the Long-Run1.1Short Run vs. Long Run in Perfect CompetitionIn thelong run, all factors of production (like laborand capital) can change. Firms are free toenter orleave the market.•If firms are making high profits, new firms enter.•More firms mean more competition.•Increased competition pushes prices down.As a result,economic profits fall to zero in the long run. Firms still earn normal profits, but notextra (economic) profits.1.2Why Monopoly Is DifferentThis clear short-run and long-run distinction doesnotwork the same way for amonopoly.Why? Because a monopoly faceshigh barriers to entry. These barriers can include legalrestrictions, control over resources, or very high startup costs. Because of these obstacles:•New firms cannot enter the market, even in the long run.•The monopolist does not face competition.•There is no pressure to push prices down.1.3Long-Run Outcome for a MonopolySince no new firms can enter the market, a monopolist can:•Avoid competition•Control supply•Continue earning positive economic profits, even in the long run

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Study GuideKey TakeawayIn perfect competition, free entry and exit eliminate economic profits over time.In a monopoly, strong barriers to entry protect the firm. Because of this protection, a monopolist cankeep earning economic profits in the long run.2. Costs of Monopoly2.1Understanding the Cost of MonopolyAmonopolistbehaves very differently from firms in aperfectly competitive market.Because there is onlyone seller, the monopolist has control over price and output.As a result:•The monopolistproduces less output•The monopolistcharges a higher price•Consumers end up paying more and buying lessThis difference creates what economists call thecost of monopoly, which is mainly felt byconsumers.

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Study Guide2.2Marginal Cost and Market PriceLook at Figure 1 while reading this part.In the diagram:•Themarginal cost (MC) curveis shown as ahorizontal line at $5•This means each extra unit costs the firm $5 to produce2.3Perfect Competition OutcomeIn aperfectly competitive market:•Themarket price is $5•The firm’smarginal revenue (MR)is alsoequal to $5•Firms produce whereMR = MCFrom the graph:•This happens at5 units of output•Price remains at$5 per unitThis level of output isefficientand gives consumers themaximum benefit.2.4Monopoly OutcomeIn amonopolistic market:•Themarginal revenue curve lies below the demand curve•The monopolist produces whereMR = MCFrom the graph:•MR intersects MC at3 units of output•At this output level, consumers are willing to pay$7 per unit•So, the monopolist charges$7 instead of $5

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Study GuideResult:•Lower output (3 units instead of 5)•Higher price ($7 instead of $5)2.5Impact on Consumer SurplusConsumer surplusis the difference between:•What consumers are willing to pay•And what they actually payUnder Perfect CompetitionRefer totriangle abdin Figure 1•This entire triangle representsconsumer surplus•Consumers enjoymaximum benefitUnder MonopolyRefer totrapezoid fedbin Figure 1•Consumer surplusshrinks•Part of this lost surplus goes to the monopolist•Part of it disappears completely2.6Who Gets the Lost Surplus?•Area fecb→ Becomesextra profit for the monopolist•Area edc→ This is thedeadweight lossDeadweight lossmeans:•Society loses potential gains from trade•Output is inefficiently low•No one benefits from this loss

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Study Guide2.7Why Governments Care About MonopoliesBecause monopolies:•Reduce consumer welfare•Raise prices unfairly•Create deadweight lossGovernments often:•Passantitrust lawsto break up monopolies•Regulate natural monopolies(like electricity or railways)Key Takeaway•Monopoliesproduce lessandcharge more•Consumers lose surplus•Some loss becomes monopoly profit•Some loss becomesdeadweight loss•This explains why monopolies are often regulated3. Conditions for Monopoly3.1What Is a Monopoly?In aperfectly competitive market, there are many small firms. No single firm has much control overthe market.In contrast, amonopolyexists whenonly one firmoperates in the entire market. This single firm isusually very large andsupplies all of the productthat consumers want. Because there is only onefirm,the firm’s supply is the same as the market supply.
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Document Details

University
Texas A&M University
Course
Economics
Subject
Economics

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