Chapter 15 focuses on monopolies. A monopoly occurs when there is a single firm that supplies a product without close substitutes. Monopolies occur because other firms are unable to join the market, either through monopoly resources (key resource to production owned by a single firm), government regulation (patents or copyrights), or the production process (cost). Monopoly resources are an example of something that can cause a monopoly, but due to the nature of the market (large number of goods with similar substitutes), monopoly resources appear less common.Government can create monopolies as well, either through patents or copyright laws. These two examples offer a way for firms to own a monopoly of a specific good. Even though monopolies are generally portrayed in a negative light, patents and copyright laws provide an incentive for firms and people to create new and better innovations. A natural monopoly arises when a single firm can provide a good to a market with a smaller cost than two or more firms. It rises when there are economies of scale over a period of time.
Profit maximization is determined by the intersection of marginal revenue and cost. Marginal revenue is always less than the demand curve (average revenue). The demand curve determines what the price is. From the intersection, draw a line up to the price curve, and then take the area of the spot on the price curve to the ATC.
The socially efficient quantity of production in the case of a monopoly occurs where the demand curve and marginal-cost intersect. Below the quantity causes the value to consumers to rise over the cost of production, so increasing outputs causes total surplus to increase. On the other hand, a unit above the quantity would raise total surplus through decreasing output. However, monopolistic firms produce less than the socially efficient quantity of output.
Price discrimination is when businesses sell the same good at different prices to different customers. When this is considered perfect, the monopolist knows exactly the willingness to pay of each customer, charging them for that price.
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