monopoly this firm is now the ultimate market power in the galaxy
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MonopolyThis firm is now the ultimate market power in the galaxy
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Monopoly = MarketO The lack of direct competition
means that a monopoly behaves differenty than does a firm in a competitive market
O In monopoly situations, the demand curve facing the firm is the same as the market demand curve.
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Price vs Marginal Revenue
O FOR FIRMS IN COMPETITIVE MARKETS:O Price = Marginal Revenue
O When the price is set by the market, the additional revenue from one more unit of output is the same as the market price
O FOR MONOPOLY FIRM:O Price > MR
O When a monopoly firm selects its output level, it is subject to the Law of Demand
O In order to sell additional amounts of output, the price must decrease
O The MR curve will be below the price curve at every point except the first
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Profit MaximizationO In addition to making a decision on
output, monopoly firms must make a pricing decision as well.
O General Profit Maximization RuleO When MR = MC profit is maximized
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Monopoly Price & Profits
O The profit maximizing rate of output is found at the intersection of the marginal revenue and marginal cost curves
O The highest price consumers are willing to pay for a specific quantity of output is established by the demand curve
O Only ONE price maximizes profit
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Barriers to EntryO Threat of Entry
O Monopolies attain higher prices and profits by limiting output
O This power depends on oother firms not entering the market
O Types of Barrier to Entry:O Patent ProtectionO Legal HarassmentO Exclusive LicensingO Bundled ProductsO Government Franchises
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Comparative OutcomesO Monopoly vs Competition
O See chart on pg 156O Monopoly vs DuopolyO Monopoly vs OligopolyO Monopoly vs Monopolistic
Competition
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Defenses of MonopolyO Entrepreneurial IncentivesO Economies of ScaleO Natural MonopliesO Contestable MarketsO Structure vs Behavior
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Practice Problems for Homework
O Page 166O Problems # 2, 4, 6, 7, 8