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Economics - Monopoly

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    Study Guide Economics – Monopoly 1. Monopoly in the Long - Run 1.1 Short Run vs. Long Run in Perfect Competition In the long run , all factors of production (like labor and capital) can change. Firms are free to enter or leave 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 not extra (economic) profits. 1.2 Why Monopoly Is Different This clear short - run and long - run distinction does not work the same way for a monopoly . Why? Because a monopoly faces high barriers to entry . These barriers can include legal restrictions, 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. 1.3 Long - Run Outcome for a Monopoly Since 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 Guide Key Takeaway In 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 can keep earning economic profits in the long run . 2. Costs of Monopoly 2.1 Understanding the Cost of Monopoly A monopolist behaves very differently from firms in a perfectly competitive market . Because there is only one seller , the monopolist has control over price and output. As a result: • The monopolist produces less output • The monopolist charges a higher price • Consumers end up paying more and buying less This difference creates what economists call the cost of monopoly , which is mainly felt by consumers.

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    Study Guide 2.2 Marginal Cost and Market Price Look at Figure 1 while reading this part. In the diagram: • The marginal cost (MC) curve is shown as a horizontal line at $5 • This means each extra unit costs the firm $5 to produce 2.3 Perfect Competition Outcome In a perfectly competitive market : • The market price is $5 • The firm’s marginal revenue (MR) is also equal to $5 • Firms produce where MR = MC From the graph: • This happens at 5 units of output • Price remains at $5 per unit This level of output is efficient and gives consumers the maximum benefit . 2.4 Monopoly Outcome In a monopolistic market : • The marginal revenue curve lies below the demand curve • The monopolist produces where MR = MC From the graph: • MR intersects MC at 3 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 Guide Result: • Lower output (3 units instead of 5) • Higher price ($7 instead of $5) 2.5 Impact on Consumer Surplus Consumer surplus is the difference between: • What consumers are willing to pay • And what they actually pay Under Perfect Competition Refer to triangle abd in Figure 1 • This entire triangle represents consumer surplus • Consumers enjoy maximum benefit Under Monopoly Refer to trapezoid fedb in Figure 1 • Consumer surplus shrinks • Part of this lost surplus goes to the monopolist • Part of it disappears completely 2.6 Who Gets the Lost Surplus? • Area fecb → Becomes extra profit for the monopolist • Area edc → This is the deadweight loss Deadweight loss means: • Society loses potential gains from trade • Output is inefficiently low • No one benefits from this loss

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    Study Guide 2.7 Why Governments Care About Monopolies Because monopolies: • Reduce consumer welfare • Raise prices unfairly • Create deadweight loss Governments often: • Pass antitrust laws to break up monopolies • Regulate natural monopolies (like electricity or railways) Key Takeaway • Monopolies produce less and charge more • Consumers lose surplus • Some loss becomes monopoly profit • Some loss becomes deadweight loss • This explains why monopolies are often regulated 3. Conditions for Monopoly 3.1 What Is a Monopoly? In a perfectly competitive market , there are many small firms. No single firm has much control over the market. In contrast, a monopoly exists when only one firm operates in the entire market. This single firm is usually very large and supplies all of the product that consumers want. Because there is only one firm, the firm’s supply is the same as the market supply .

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