Ap Micro Chapter 10 Notes
CHAPTER 10: PURE MONOPOLY
Pure monopoly – single firm is the sole producer of a product for which there are no close substitutes; characteristics: * Single seller – sole producer or sole supplier; firm and industry are synonymous * No close substitutes – consumer who chooses not to buy the monopolized product must live without it * Price maker – pure monopolist controls the total quantity supplied, so has considerable control over the price; changes product price by changing quantity supplied; will use this power whenever it is advantageous to do so * Blocked entry – no immediate competitors because certain barriers (economic, technological, legal, etc.) keep potential competitors from entering the industry * Nonprice competition – product may be standardized (natural gas, electricity), which engage in public relations advertising, or differentiated (Windows, Frisbees), which engage in product attribute advertising
Examples of monopoly: public utilities, sports teams, Wham-O (near-monopolies)
Major barriers to entry: * Economies of scale – because of technology, economies of scale are extensive; only a few large firms (or, in the extreme, only a single large firm) can achieve low average total costs. When long-run ATC is declining, only a monopolist can produce any particular output at minimum total cost * Legal barriers: * Patents – exclusive rights of an inventor to use (or to allow another to use) his or her invention * Licenses – government limitations on entry into an industry; used in radio, television, taxis, etc. * Ownership or control of essential resources – using private property as an obstacle to potential rivals (etc. sports leagues) * Pricing and other strategic barriers to entry – slashing prices, stepping up advertising, etc. to block competitors
Model of pure monopoly – three assumptions 1. Patents, economies of scale, or resource ownership secure the firm’s monopoly 2. No unit of
Pure monopoly – single firm is the sole producer of a product for which there are no close substitutes; characteristics: * Single seller – sole producer or sole supplier; firm and industry are synonymous * No close substitutes – consumer who chooses not to buy the monopolized product must live without it * Price maker – pure monopolist controls the total quantity supplied, so has considerable control over the price; changes product price by changing quantity supplied; will use this power whenever it is advantageous to do so * Blocked entry – no immediate competitors because certain barriers (economic, technological, legal, etc.) keep potential competitors from entering the industry * Nonprice competition – product may be standardized (natural gas, electricity), which engage in public relations advertising, or differentiated (Windows, Frisbees), which engage in product attribute advertising
Examples of monopoly: public utilities, sports teams, Wham-O (near-monopolies)
Major barriers to entry: * Economies of scale – because of technology, economies of scale are extensive; only a few large firms (or, in the extreme, only a single large firm) can achieve low average total costs. When long-run ATC is declining, only a monopolist can produce any particular output at minimum total cost * Legal barriers: * Patents – exclusive rights of an inventor to use (or to allow another to use) his or her invention * Licenses – government limitations on entry into an industry; used in radio, television, taxis, etc. * Ownership or control of essential resources – using private property as an obstacle to potential rivals (etc. sports leagues) * Pricing and other strategic barriers to entry – slashing prices, stepping up advertising, etc. to block competitors
Model of pure monopoly – three assumptions 1. Patents, economies of scale, or resource ownership secure the firm’s monopoly 2. No unit of