Monopoly Review View Monopoly chapter with videos  from www.textbooksfree.org

A monopoly exists when one firm has  continued control over a unique market.
A. By controlling supply and therefore price, a monopoly
     may earn high economic profit.
B. Continued existence presupposes barriers which
     restrict market entry of competing firms.
C. Barriers to entry
     1. Economies of scale require
         a. Large initial capital investment
         b. Large R & D expenditures
     2. Ownership of raw material, strategically located land, etc.
     3. Patents and copyrights
     4. Unfair competition
             5. Natural barriers to entry lead to natural monopolies.
                 a. Economies of scale can be so large that more than one producer is illogical.
                 a. Natural monopolies reduce duplication, waste, and confusion.
                 c. Natural monopolies are often privately owned and publicly regulated.
                 d. Example: public utilities
                 e. Deregulation in the 1980's and 1990's decreased the importance of natural monopolies.
        D. Economic analysis of monopoly
             1. With pure competition
                 a. P = MR = MC 
                 b. Production is at the lowest point on ATC curve.
             2. With Monopoly  
                 a. P > MR = MC
                 b. Production is not at the lowest point indicated by the ATC curve.
                 c. Quantity produced is restricted.
             3. A monopoly is a price maker.
        E Are monopolies inefficient
           1. There are many inefficiencies.
               a. Lack of competition makes monopolies wasteful as there is nothing to force efficiency.
               b. Advertising just to enhance barriers to entry.
               c. Litigate to protect monopoly power
               d. Active politically to protect monopoly power
           2. Large scale efficiencies
               a. Bigness creates efficiencies of scale and ATC curve may be below that of PC. 
               b. Creates the necessary profit and profit potential required for investors to assume risk
                   associated with large capital investment requirements including ever-increasing R & D.

F. Some Monopolies Make No Profit.  
1..Rising costs and shrinking demand may result
    in a monopoly not making a profit.  
2. When this happens, demand (average revenue)
    is always below the ATC and a loss results.
3 Econ in 60 Seconds Video: Regulating a Monopoly




 

G. Some Monopolies are Regulated.
     1A. If demand is inelastic, profit may be excessive.
      2. Price Discriminating Monopoly Micro in 60 seconds
      3. Government regulates with antitrust laws, government
           ownership, and limiting profit by restricting price to ATC.
       4. M is the where monopoly maximizes profits.
       5. Regulated price R yields a normal return.
       6. E is the economically optimum price.