Monopoly

1. While a competitive firm is a price taker, a monopoly firm is a price maker.

2. A firm is considered monopoly if: it is the sole seller of its product; its product does not have close substitutes.

3. The fundamental cause of monopoly is barriers to entry.

4. Barriers to entry have 3 sources:

* Ownership of a key resource.

* The government gives a single firm the exclusive right to produce some good.

* Costs of production make a single producer more efficient than a large number of producers.

5. Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.

6. Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.

7. Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.

8. An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could 2 or more firms.

9. A natural monopoly arises when there are economies of scale over the relevant range of output.

10. Monopoly: is the sole producer; faces a downward-sloping demand curve; is a price maker; reduces price to increase scale.

11. Competitive firm: is one of many producers; faces a horizontal demand curve; is a price taker; sells as much or as little at the same price.

12. A monopoly’s marginal revenue (MR) is always less than the price of its good: the demand curve is downward sloping; when a monopoly drops the price to sell one more unit, the revenue received from previously sold unit also decreases.

13. When a monopoly increases the amount it sells, it has 2 effects on TR: the output effect-more output is sold, so Q is higher; the price effect: price falls, so P is lower.

14. A monopoly maximizes profit by producing the quantity at which MR = MC

15. It then uses the demand curve to...