Economics: Monopoly (not the board game)

Difficulty: 1/3 (Similar concepts compared to the previous chapter)
Review: 4/5 (Could use more explaining why MR is less than P)

A monopoly is created if it is the sole seller of a product without close substitutes- other firms can't enter because of barriers of entry. These entries are (1) a key resource is owned by a single firm, (2) the government gives a single firm exclusive right to produce a good/service like through a copyright or patent, (3) the cost of production makes a single producer more efficient than multiple producers.

Earlier, we discussed natural monopolies. These goods are excludable not rival in consumption. They are also created when a single firm can supply a good/service at a cost lower than with multiple firms. This also means that economies of scale, with more output in the single firm, ATC is minimized; however, when multiple firms are producing, ATC is greater amongst each of them.

The monopoly's demand curve is downward sloping because it is the price maker, and with changes in price the quantity demanded of course changes. On the other hand, as described previously, a competitive firm's demand curve is flat as a price taker.

A monopolist's marginal revenue is always less than the price of the good. This is because the downward sloping demand curve contributes to the marginal revenue decrease as more is produced. Revenue (P x Q) is affected by the output effect when more output is sold, Q is higher, but also the price effect, the price falls, so P is lower.

Profit maximization occurs where marginal cost and marginal revenue intersect. Since marginal revenue is less than demand, the profit maximization point for monopolies results in a quantity less than the equilibrium efficiency point, creating a deadweight loss. Thus, monopolies maximize producer surplus but not total surplus. Note that the only reason why there is a social cost is because of the deadweight loss, the "economic pie" is smaller, not just only skewed towards the producer.

The monopoly's profit can be measured by (P - ATC) * Q where Q is determined by the intersection of MC and MR and P is determined by demand curve at that Q.

There are 4 policies to respond to monopolies the government can do. (1) They can increase competition in the market, with antitrust laws, (2) regulation like setting the price to be marginal cost, (3) public ownership, (4) and doing nothing.

Price discrimination can also be employed by the monopolist, perfect if they know the willingness to pay of every customer and the producer gets all the surplus- effectively removing deadweight loss but giving all surplus to the producer.