Wednesday, November 28, 2007

Monopoly

A firm is a monopoly if
  • It is the sole seller of its product
  • its product does not have close substitute
  • the market has barriers of entry

Three sources of bariers of entry

  • A single firm owns a key resource
  • The govt gives a single firm the exclusive right to produce the good
  • Costs of production make a single producer more efficient than a large number of producers

A natural monopoly is when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Natural monopoly arises when there are economies of scale over the relevant range of output

The ATC in a natural monopoly is downward sloping due to huge FC and small MC

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