Chapter 15: Monopoly

This chapter discussed monopolies. A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost  than many firms could. Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units is produced. As a result, a monopoly's marginal revenue is always below the price of the good. Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. Unlike the competitive firm, a monopoly firm's price exceeds its marginal revenue, so its price exceeds marginal cost. Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. The regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all. A monopolist often can raise its profits by charging different prices for the same good based on a buyer's willingness to pay. The practice can raise economic welfare by getting the good to some consumers who otherwise would not buy it.