Because the pure monopolist is the industry, the demand curve is the market demand curve. Demand curve is downward sloping: as price decreases, quantity demanded increases. Monopoly’s Demand Curve:
Marginal Revenue is Less Than Price – the firm can only increase its sales by charging a lower price thus causing marginal revenue to be less than price The lower price applies not only to the extra output sold but also to all prior units of output. Each additional unit of output sold increases TR by the amount = to its own price less the sum of all price cuts which apply to all prior units of output. The Monopolist is a “Price Maker.”
Firms can influence supply through its own output decisions. In changing market supply, they affect product price.
The Monopolist Prices in the Elastic Region of Demand.
When demand is inelastic, a decline in price will reduce TR. MR lies below its demand curve.
The profit maximizing monopolist will always want to avoid the inelastic segment of its demand curve in favor of some price-quantity combination in the elastic region. Imperfect comp. isn’t socially efficient.
The single seller makes a product that has no “good” substitute. Other firms may be able to produce the good or service but choose not to enter the market or are barred from it. Sources of Monopoly Entry Barriers:
Natural monopoly: the most efficient scale of production is so large, relative to market demand, that a single firm dominates the market. Patents, copyrights, licenses, and franchises: government protection of a firm’s right to produce a unique product. Economic and/or legal restrictions, strategies or situations that make entry more difficult for new competitors than for the existing monopoly firm. Natural Monopolies:
Goods and services whose delivery requires the construction of a physical network (wires, pipes, etc.). In such industries (local phone service, water, sewage removal, electricity, gas) the physical networks display decreasing...
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