Summary of chapter 14 of the book Economics. Written by N. Gregory Mankiw and Mark P. Taylor, 3rd edition. Written for IBMS students of Avans or for the course Economics. ISBN 9781408093795.
Imperfect competition
Imperfect competition – exists where firms are able to differentiate their product in some way and
so can have some influence over the price.
Market share – the proportion of total sales in a market accounted for by a particular firm.
Market power – where a firm is able to raise the price of its product and not lose all its sales to rivals.
Why monopolies arise
Monopoly – a firm that is the sole seller of a product without close substitutes.
Fundamental cause of monopoly: barriers to entry – anything which prevents a firm from entering a
market or industry.
Barriers to entry have 4 main sources:
• a key resource is owned by a single firm
• government gives a single firm the exclusive right to produce
• costs of production make a single producer more efficient than multiple producers
• a firm is able to gain control of other firms in the market, thus grow in size
Two important examples of how government creates a monopoly:
1. Patent – the right conferred on the owner to prevent anyone else making or using an invention or
manufacturing process without permission.
2. Copyright – the right of an individual or organisation to own thing they create in the same way as a
physical object to prevent others from copying or reproducing the creation.
Natural monopoly – a monopoly that arises because a single firm can supply a good or service to an
entire market at a smaller cost than could two or more firms.
How monopolies make production and pricing decisions
Competitive firm:
-
Monopoly:
- is the sole producer
- faces a downward-sloping demand curve
- is a price maker
- reduces price to increase sales
Monopoly’s revenue:
A monopolist’s marginal revenue is always less than the price of its good.
(Competitive firm, marginal revenue equals the price of its good)
When a monopoly increases the amount of it sells, it has 2 effects on total revenue (PxQ):
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