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Microeconmics: The Monopoly

Let’s start our introduction to monopolies by offering a definition: An industry comprising of only one firm. Examples include utility companies (gas, electric, water), rail, and cable companies.

Reasons for monopoly:

(1) No close substitutes
– If substitutes for a good exist, the firm would face competition from the producer of the substitute.

(2) Barriers to entry
– If a single firm is to remain the sole producer, particularly in the long run, there must be some berrier preventing other firms to enter into this industry.

(i) Legal (or created)
– Competition/entry is restricted by government decree. (i.e, the granting of a public franchise, government license, patent, or cpoyright)

(ii) Natural
– Sole owner of natural resource or raw material;
– Economies of scale: single producer can supply entire market @ a lower ATC than 2 or more firms.

Note: Under monopoly, the demand curve for the industry is also the demand curve for the firm.

Single Price Monopolist

Some monopolists charge a single price for its product/service. Given a down-wards sloping industry demand curce, this means that in order to sell more output, the monopolist must reduce the price.

If we assume a linear downward-sloping demand curve for the monopolist, the total revenue curve is shaped like an inverted parabola.

We know that the monopolists MR curve is always falling, but it is also always below the demand curve.

That is, MR > Price for every level of output Q.

More to come.

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