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Summary intermediate economics, chapter 13 notes (Varian)
Its notes from chapter 13 of Varian's intermediate economics
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13 - Monopolize the Human Race Explain how monopolies rise
Explain how single price monopoly determines its output and price
Compare performance and efficiency of single price monopolies v. competition
Explain how price discrimination increases profit
Explain how monopoly regulation influences output, price, economic profit, and efficiency
Monopoly: A Market with a single firm which produces G&S with no close substitutes and that is
protected by a barrier that prevents other firms from entering that market
No close substitute: Like Water as a Public Utility
Barrier to Entry: 3 Main Barriers Are -
1. Natural: Economies of scale enable one firm to supply the entire market at the lowest cost
possible. Firms which deliver gas and electricity are an example of this.
2. Ownership: One firm owns a significant portion of a key resource. Like Diamonds with De Beers
3. Legal: There are four main legal barriers
i) Public Franchise: Exclusive right granted to a firm to supply a good or service. An example is
Canada Post
ii) Government License: Controls entry into occupations, professions, and industries. Examples are
Medicine and Law.
iii) Patent: Exclusive right granted to inventor of a product or service.
iv) Copyright: Exclusive right granted to the author or composer of a literary musical, dramatic, or
artistic work
Patents encourage invention and innovation
Monopoly Price Setting Strategies: Unlike the competitive market firms, monopoly market firms set
their own prices. Here is 2 pricing strategies:
1. Single Price: A firm which sells each unit of output for the same price to all its customers. An
example is De Beers.
2. Price Discrimination: A firm which sells different units of goods or services for different. An
example is Microsoft, or even a Pizza Shop. For example, Microsoft charges consumers
, differently, selling the same product, Windows, at different prices, for different types of
customers. Its also when a Pizza Shop sells a second slice of pizza at a lower price.
A note about Price Discrimination: Like the Pizza Shop, Price Discrimination can offer customers
a favor or value, such as offering a lower price for the purchase of one more unit. It can however
also be the case where firms are charging the highest possible price for each unit sold and
making the largest possible profit. Theoretically this isn't morally positive or negative on its own;
which demands a case by case analysis and closer looking at the inner workings, financial
records, and social benefit which originate from the firm that meet social interests of a society.
Single Price Monopoly Output & Price Decision
Maximum Total Revenue is at x = 5 in theory, for MR curve. This translates to the elastic regions
of the Firm and Market Curve. This relationship implies a profit-maximizing monopoly never
produces in the inelastic region of the Firm and Market Curve. If a firm chooses to produce in
the inelastic region, it would have to charge a higher price.
The regions or segments of elasticity depicted above, with elasticity being in the upper and
inelasticity being in the lower, represents elasticity of demand
In a monopoly, demand is always elastic regardless
Fall in price brings Revenue gain from Marginal Revenue
increased quantity Status
sold
Elastic Demand Increase in Total Outweighs revenue Positive
Revenue loss from lower price
Inelastic Demand Decrease in Total Is outweighed by Negative
Revenue revenue loss from
lower price
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