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[[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]]<nowiki>]</nowiki>
[[Economics|Economics Lectures]] - <nowiki>[</nowiki>[[Economics_Lecture_One|1]] - [[Economics_Lecture_Two|2]] - [[Economics_Lecture_Three|3]] - [[Economics_Lecture_Four|4]] - [[Economics_Lecture_Five|5]] - [[Economics_Lecture_Six|6]] - [[Economics_Lecture_Seven|7]] - [[Economics_Lecture_Eight|8]]<nowiki>]</nowiki>
Eighth Lecture – Monopoly
Instructor, Andy Schlafly
==Introduction==
We are now more than halfway through this course. We have already covered all of the basic concepts and are applying them to various new situations.
We are now more than halfway through this course. We have already covered all of the basic concepts and are applying them to various new situations.
Is the monopoly able to increase its price without limitation? No. Demand will decrease as the price increases simply because people have limits on what they can spend. Even a monopoly has to live with the demand curve. The marginal revenue is not always positive as price increases, even for a monopoly. At some high price, a further increase in price causes a larger drop in quantity and the marginal revenue goes down. A monopoly does not increase its price when its marginal revenue is less than zero, or when it is less than its marginal cost.
Is the monopoly able to increase its price without limitation? No. Demand will decrease as the price increases simply because people have limits on what they can spend. Even a monopoly has to live with the demand curve. The marginal revenue is not always positive as price increases, even for a monopoly. At some high price, a further increase in price causes a larger drop in quantity and the marginal revenue goes down. A monopoly does not increase its price when its marginal revenue is less than zero, or when it is less than its marginal cost.
==How Monopolies Arise==
Monopolies arise in a variety of ways. Government sometimes creates monopolies by operation of law. A maker of a vaccine will enjoy a profitable monopoly if it can lobby state legislatures to require vaccination for all children. A cable television company can obtain a monopoly over a region by winning a franchise from the local town. Once a monopoly forms this way, there are then “legal barriers to entry” by other firms who want to compete. The law prevents competition.
Monopolies arise in a variety of ways. Government sometimes creates monopolies by operation of law. A maker of a vaccine will enjoy a profitable monopoly if it can lobby state legislatures to require vaccination for all children. A cable television company can obtain a monopoly over a region by winning a franchise from the local town. Once a monopoly forms this way, there are then “legal barriers to entry” by other firms who want to compete. The law prevents competition.
Like all “barriers to entry,” they can be misused to suppress competition or even criticism. Should copyright law limit or prevent the copying of the Bible, or competition in selling the Bible?
Like all “barriers to entry,” they can be misused to suppress competition or even criticism. Should copyright law limit or prevent the copying of the Bible, or competition in selling the Bible?
==Pricing by Monopoly==
Even Bill Gates and the Microsoft monopoly is limited by the demand curve. A monopoly will not charge the highest price that the wealthiest buyer can pay. A monopoly makes more profit by lowering price until marginal revenue (MR) equals marginal cost (MC). Memorize this and use it on the homework: MR=MC. When MC=0, then profit is maximized by finding the price when MR=0 also.
Even Bill Gates and the Microsoft monopoly is limited by the demand curve. A monopoly will not charge the highest price that the wealthiest buyer can pay. A monopoly makes more profit by lowering price until marginal revenue (MR) equals marginal cost (MC). Memorize this and use it on the homework: MR=MC. When MC=0, then profit is maximized by finding the price when MR=0 also.
If a firm can raise the price of its goods or services and still hold on to some of its customers, then it must possess at least some monopoly power. Professional athletes and actors enjoys a bit of a monopoly on their own fans, but competition does exist for those fans.
If a firm can raise the price of its goods or services and still hold on to some of its customers, then it must possess at least some monopoly power. Professional athletes and actors enjoys a bit of a monopoly on their own fans, but competition does exist for those fans.
==Social Costs==
Adam Smith, the founder of the “invisible hand” in economics, was an opponent of monopolies created by the government. He viewed them as very hurtful, and wrote brilliant criticisms of them. Monopolies impose a social cost on everyone else. They produce less and cost more. They maximize their profit by increasing the price and reducing the quantity sold. They are also less efficient and less innovative than a competitive company.
Adam Smith, the founder of the “invisible hand” in economics, was an opponent of monopolies created by the government. He viewed them as very hurtful, and wrote brilliant criticisms of them. Monopolies impose a social cost on everyone else. They produce less and cost more. They maximize their profit by increasing the price and reducing the quantity sold. They are also less efficient and less innovative than a competitive company.
Another difference is that an increase in demand does not necessarily cause a monopoly to supply more. In contrast, in a competitive industry, an increase in demand always forces an increase in supply (greater Q).
Another difference is that an increase in demand does not necessarily cause a monopoly to supply more. In contrast, in a competitive industry, an increase in demand always forces an increase in supply (greater Q).
==Assignment==
Read and, if necessary, reread the above lecture.
Read and, if necessary, reread the above lecture.
===Introductory===
1. A monopoly can be extraordinarily profitable because there is no __________.
2. Provide three specific examples of monopolies and describe briefly what they do.
2. Provide three specific examples of monopolies and describe briefly what they do.
3. Given an example of how you lose time, money, or efficiency due to a specific monopoly.
3. Given an example of how you lose time, money, or efficiency due to a specific monopoly.
Intermediate 4. “Monopolies may be bad, but government regulations of monopolies are even worse!” Do you agree? Explain.
===Intermediate===
4. “Monopolies may be bad, but government regulations of monopolies are even worse!” Do you agree? Explain.
5. List ways that monopolies can be established.
5. List ways that monopolies can be established.
8. Suppose Anthony owns a company having marginal costs of $5 for all his units. If he sells only one, then he reaps $11; selling two fetches a price of $10 piece; selling 3 attains a price of $9; selling four reaps $8; Q=5 would have P=$7; Q=6 has P=$6, etc. A competitive firm would have the same cost and demand numbers. What does Anthony sell at, and what is the social cost of his monopoly?
8. Suppose Anthony owns a company having marginal costs of $5 for all his units. If he sells only one, then he reaps $11; selling two fetches a price of $10 piece; selling 3 attains a price of $9; selling four reaps $8; Q=5 would have P=$7; Q=6 has P=$6, etc. A competitive firm would have the same cost and demand numbers. What does Anthony sell at, and what is the social cost of his monopoly?
Honors 9. Estimates are not very accurate about homeschooling, but some guess that 1 out of every 25 students is homeschooled. At what level or fraction would homeschooling end the public school monopoly? Discuss.
===Honors===
9. Estimates are not very accurate about homeschooling, but some guess that 1 out of every 25 students is homeschooled. At what level or fraction would homeschooling end the public school monopoly? Discuss.
10. Suppose you live in a valley where water flows freely and abundantly from a spring. Suppose your entire family uses on average 80 gallons a day. But then a company bought the spring. If the demand curve is a straight line from P=$100, Q=0 to P=$0, Q=80, at what price and quantity would the company sell water?
10. Suppose you live in a valley where water flows freely and abundantly from a spring. Suppose your entire family uses on average 80 gallons a day. But then a company bought the spring. If the demand curve is a straight line from P=$100, Q=0 to P=$0, Q=80, at what price and quantity would the company sell water?
11. Monopolies: should the government regulate them? If so, how?
11. Monopolies: should the government regulate them? If so, how?