1. Monopoly
AP micro 10/20

2. Quick Review: Types of Market Structures
Are Products Differentiated? No
Yes
This system of market structures is based on two dimensions:
The number of producers in the market (one, few, or many)
Whether the goods offered are identical or differentiated
Differentiated goods are goods that are different but considered somewhat substitutable by consumers (think Coke versus Pepsi).
One
Monopoly
Not applicable
How Many Producers Are There?
Oligopoly
Few
Perfect competition
Monopolistic competition
Many

3. What is a Monopoly? Our First Departure from Perfect Competition…
A monopolist is a firm that is the only producer of a good that has no close substitutes.
The ability of a monopolist to raise its price above the competitive level by reducing output is known as market power.

4. Examples of Monopolies
Very few true monopolies – why?
They are illegal due to anti-trust laws in the U.S.
Barriers to entry are extremely high
Types of barriers to entry:
Control of a scarce resource/input
Increasing returns to scale
Technological superiority
Government-created barriers

5. Scare Resource Monopoly
Scare resource monopolies – controls a resource or input crucial to an industry can prevent other firms from entering its market
Ex. Controlling the mines that produce the great bulk of the world’s diamonds

6. Increasing Returns to Scale—Natural Monopolies
Increasing returns to scale: when ATC falls as output increases (leads to larger companies that drive out smaller ones)
Also creates huge barriers to entry
Monopoly that develops because of this is called a natural monopoly
Ex. Local utilities

7. Increasing Returns to Scale Create Natural Monopolies
Price, cost
Fixed costs required to operate are very high  the firm’s ATC curve declines over the range of output at which price is greater than or equal to average total cost.
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even price A T C D
Quantity
Relevant output range
This gives the firm economies of scale over the entire range of output at which the firm would at least break even in the long run. As a result, a given quantity of output is produced more cheaply by one large firm than by two or more smaller firms.

8. Technological Superiority
A firm that maintains consistent technological advantage over competitors can become a monopolist
scientific advance, manufacturing control etc.

9. Government-Created Barriers
Legally created monopolies arise from patents and copyrights
Patent: sole right to make, use or sell that invention for a given period of time (usually yrs)
copyright: creator of literary or artistic work sole rights to profit from that work (usually the lifetime of the creator)
Ex. Certain pharmaceutical drugs

10. What a Monopolist Does
Equilibrium is at C, where the price is PC and the quantity is QC. A monopolist reduces the quantity supplied to QM, and moves up the demand curve from C to M, raising the price to PM.
Price S P M M
2. … and raises price. C P C D Q M Q C
Quantity
1. Compared to perfect competition, a monopolist reduces output…