Scot Wick Blog

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 15 of 36 Monopoly

Section 31 of 31

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Table 2 here

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Figure 8 here

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This chapter we have discussed the behavior of firms that have total or some monopoly power.

This results in their having total or some control over prices they charge.

We have seen these firms behave differently from perfectly competitive firms.

Table 2 summarizes the key similarities and differences between competitive and monopoly markets.

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Per Figure 8, from the standpoint of public policy the crucial results of monopoly are it

· produces less than the socially efficient quantity

· charges a price above marginal revenue and marginal cost

· causes deadweight losses, where maximum total producer + supplier surplus is not attained

In various cases, these inefficiencies

· can be mitigated through price discrimination by the monopolist

· result in policymakers taking action to control the monopolist’s price

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In one sense monopolies are common because most firms

· have some control over their product prices

· are not forced to charge a set market price for their goods

· sell goods not exactly the same as those offered by other firms

A Ford Taurus is not the same as a Toyota Camry, and Ben and Jerry's ice cream is different from Breyer's

Each of these differentiated goods has a downward-sloping demand curve which gives each producer some degree of monopoly power.

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Firms with substantial monopoly power are rare.

Few goods are truly unique, most goods have substitutes not exactly the same but similar.

Ben and Jerry can raise the price of their ice cream a little without losing all their sales.

But if they raise it a big amount sales will fall substantially as customers switch to another brand.

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Monopoly power is a matter of degree.

It is true many firms have some monopoly power.

It is also true their monopoly power is usually limited

Almost all firms operate in at least somewhat competitive markets

(End of chapter 15 of 36).

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Congratulations! 15/36 = 42% of way to becoming a competent economist.