By Andrew Liu and Mason Liang

Why Monopolies Arise Key Cause: Barrier to

Entry Examples: Ownership of Key

Resource Government-created

Monopolies Low Cost of

Production for one firm

Monopoly Resources Owning a key resource For example: owning the

only well in a small town This is very hard to

achieve because of the size of the economy

Resources are usually owned by many people

Government-Created Monopolies Government can give

exclusive rights to a firm to sell a product or service

Patents and copyrights are good examples

They increase incentive for creative activity

Natural Monopolies A firm has a lower cost of production than

everyone else An uncongested bridge can be a natural

monopoly

How Monopolies Make Decisions The key quality of a monopoly is the ability to

influence price Total revenue = Quantity sold x Price Average revenue = Total revenue/Quantity (Price) Marginal revenue = ΔTotal revenue/ΔQuantity Marginal revenue is always less than the price

Profit Maximization Profit-maximizing

quantity is where MR=MC

Price is determined by the demand curve

P > MR=MC Profit = (P-ATC) x Q

Deadweight Loss

The efficient quantity is where D=MC; monopolies produce at MR=MC

Monopolies produces less than the socially efficient quantity of output

Public Policy Increasing Competition with Antitrust Laws Regulation Public Ownership Doing Nothing

Increasing Competition with Antitrust Laws Sherman Anti-Trust Act Clayton Anti-Trust Act Synergies Costs vs. Benefits

Regulation What price should the government set it at? What are the issues with regulation?

Public Ownership The government takes

over the monopoly

Ex: Postal Service

Problems with public ownership

Doing Nothing Some economists argue

that government should not try to remedy the inefficiencies of monopoly pricing.

Price Discrimination Charging different rates to different customers Reduces inefficiency Moral aspects

Examples of Price Discrimination Movie Tickets Airline Prices Discount Coupons Financial Aid