HAT Manifesto Part 1/3 - Rubric Cube - 250406 edit

 

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

PART 5 Firm Behavior and the Organization of Industry

Chapter 15 of 32 - Monopoly

Section 5 of 32

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Figure 1 – Economies of Scale as a Cause of Monopoly

When a firm's average total cost (ATC) curve for producing a product continually declines, the firm has a natural monopoly.

In this case, if production is divided among more firms, each firm produces less and ATC rises.

For this product, a single firm can produce any given amount at the smallest cost.

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The fundamental cause of monopoly is barriers to entry into a market.

Three main sources of barriers to entry into a market are:

·1· monopoly resources, a single firm owns a key resource required for production

·2· government regulation, the government gives a single firm exclusive right to produce a good or service

·3·the production process, a single firm can produce a product at a lower cost than can a larger number of producers

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·3· Production Process

An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms.

A natural monopoly arises when there are economies of scale over the demanded range quantity of output.

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Figure 1 downward sloping curve shows the ATC of a firm with economies of scale.

A single firm can produce any amount of output at least cost.

For any given amount of output, a larger number of firms results in less output per firm and higher ATC.

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One common natural monopoly is water distribution.

To provide water to residents of a town a firm must build a network of pipes.

If two firms were to compete, both would have to pay the fixed cost of building a network of pipes.

The ATC of water is lowest if a single firm serves the entire market, because fixed costs are not doubled as would be with two firms.

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In most cases of markets, a firm has trouble maintaining a monopoly position without either ownership of a key resource or protection from the government.

The without these, profit of the first company in the market, initially a monopolist, attracts entrants into the market, and these entrants make the market competitive, driving down price to marginal cost.

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Entering a market where a firm has a natural monopoly is unattractive.

Would-be entrants know they cannot achieve the same low costs the monopolist enjoys.

Each firm would have a smaller piece of the market, driving up ATC.

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The size of the market is one determinant of whether an industry is a natural monopoly.

As a market becomes larger, a natural monopoly can evolve into a competitive market.

Consider a toll bridge across a river.

When the population is small the bridge is a natural monopoly, a single toll bridge can satisfy all demand for trips across the river at lowest cost.

As the population grows and the bridge becomes congested, satisfying the entire demand requires two or more bridges across the river.

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a toll bridge across a river

kawa ni kakaru yūryō bashi

川にかかる有料橋