Monopoly
Introduction
Economists have found that when nations governments proclaim that a single church denomination represents the official state religion, the church loses attendance equal to an average of about 15% of the nations population. Lower attendance at such churches is a prediction of the theory of monopoly applied to religious institutions. In this chapter, you will learn why a monopoly produces less output of a good or service that we would observe in a perfectly competitive market.
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Learning Objectives
Identify situations that can give rise to monopoly Describe the demand and marginal revenue conditions a monopolist faces Discuss how a monopolist determines how much output to produce and what price to charge Evaluate the profits earned by a monopolist Understand price discrimination Explain the social cost of monopolies
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Chapter Outline
Definition of a Monopolist Barriers to Entry The Demand Curve a Monopolist Face Elasticity and Monopoly Cost and Monopoly Profit Maximization Calculating Monopoly Profit On Making Higher Profits: Price Discrimination The Social Cost of Monopolies
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Definition of a Monopolist
Monopolist
A single supplier of a good or service for which there is no close substitute The monopolist therefore constitutes the entire industry.
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Barriers to Entry
Question
How does a firm obtain monopoly power?
Answer
Barriers to entry that allow the firm to make long-run economic profits Barriers to entry are restrictions on who can start as well as stay in business.
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Figure 25-1 The Cost Curves That Might Lead to a Natural Monopoly
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Tariffs
Taxes on imported goods
Regulation
Government enforcement of safety and quality
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Figure 25-2 Demand Curves for the Perfect Competitor and the Monopolist
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Perfect Competition
Many sellers Faces perfectly elastic demand Must produce more to sell more All units sold for same price (P = MR)
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Hint
Remember how consumers respond to a change in price.
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The demand curve slopes downward because individuals compare marginal satisfaction to cost.
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For the pure monopolist, we must seek a profit-maximizing price output combination.
The monopolist is a price searcher.
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Answer
This is where the greatest positive difference between total revenue and total cost occurs.
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Figure 25-4 Monopoly Costs, Revenues, and Profits, Panels (b) and (c)
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Issues and Applications: The Predictable Consequences of European State Religion Monopolies
For years, the church of Sweden was the official institution of the Swedish state. Today, though about 75% of the population of Sweden remain official members, the regular attendance at Sunday church services is low. The key to understanding the low Sunday service attendance by members of the Church of Sweden is its traditional status as a state monopoly. Economists who study the economics of religion have found that the pattern of low attendance experienced by Sweden holds true in all nations in which a single church predominates through state favors. The reason for this is that granting a religion monopoly has a very predictable effect: restriction of religious output and higher-priced services.
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Issues and Applications: The Predictable Consequences of European State Religion Monopolies (contd) Religious competition gradually is developing across Europe. For this reason, many economists predict that religious output is likely to increase in Europe in the coming years. Why might economists disagree about the appropriateness of using rates of church attendance as a proxy measure of religious output?
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