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| QUICK REVIEW 24-1 |
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- A pure monopolist is the sole supplier of a
product or service for which there are no close substitutes.
- Monopolies exist because of entry barriers such
as economies of scale
patents and licenses
and the ownership of essential resources.
- The monopolist's demand curve is downsloping
and
its marginal-revenue curve lies below its demand curve.
- The downsloping demand curve means that the
monopolist is a "price maker."
- The monopolist will operate in the elastic region
of demand since in the inelastic region it can increase total revenue and reduce total
cost by reducing output.
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| QUICK REVIEW 24-2 |
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- The monopolist maximizes profit (or minimizes
loss) at the output where MR 5 MC and charges the price which corresponds to this output
on its demand curve.
- The monopolist has no supply curve since any of
several prices can be associated with a specific quantity of output supplied.
- Assuming identical costs
a monopolist will be
less efficient than a purely competitive industry because the monopolist produces less
output and charges a higher price.
- The inefficiencies of monopoly may be offset or
lessened by economies of scale and
less likely
technological progress
but intensified
by the presence of X-inefficiency and rent-seeking expenditures.
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| QUICK REVIEW 24-3 |
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- Price discrimination occurs when a firm sells a
product at different prices which are not based on cost differences.
- The conditions necessary for price discrimination
are (a) monopoly power
(b) the ability to segregate buyers on the basis of demand
elasticities
and (c) the inability of buyers to resell the product.
- Compared with single pricing by a monopolist
perfect price discrimination results in greater profit and greater output. Many consumers
pay higher prices
but other buyers pay prices below the single price.
- Monopoly price can be reduced and output
increased through government regulation.
- The socially optimal price (P 5 MC) achieves
allocative efficiency but may result in losses; the fair-return price (P 5 ATC) yields a
normal profit but falls short of allocative efficiency.
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