Monopoly definitions

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  1. Monopoly Definitions Overview:
  2. Definition of Monopoly
    • Single seller with no competition
    • Two key features to Monopoly
    • No Close Substitutes
    • Barrier to Entry
  3. Barriers to Entry
    • Natural Barrier to Entry
    • Ownership Barrier to Entry
    • Legal Barrier to Entry
  4. Methods to Setting Prices in Monopoly
    • Monopoly Sets its Own Price
    • Single-Price Monopoly
    • Price Discrimination
  1. Understanding Monopoly Definitions
    State whether the firm is a monopoly by reading the following statements:
    1. The firm is protected by barrier to entry, but the good itself has a few substitutes from other firms.
    2. A firm has economies of scale even when it produces the quantity that reaches market demand.
    3. Adidas cuts its price of shoes below Nike.
    4. The firm can sell any quantity at a set price from the market.
  2. Suppose Natural, Ownership, and Legal barrier to entry holds in a monopoly market. Which of the following is false?
    1. The firm can supply the entire market at the lowest possible cost.
    2. There is no restriction to competition and entry to the market.
    3. A firm owns a huge portion of the resource to produce the good
    4. A government license must be obtained in order to create the product.
  3. Which of the following is not a legal barrier to entry?
    1. Public franchise
    2. Patent
    3. Copyright
    4. Government license
    5. None of the above
  4. Suppose a company has the monopoly for a product. Determine whether the following statement represents a single-price monopoly or price discrimination.
    1. Customer haggles with the store employee to lower the price of the product.
    2. Coupons are used to lower the price of the product.
    3. The price of the product decreases next year due to low demand.
  5. Suppose a company has the monopoly for a product. Determine whether the following statement represents a single-price monopoly or price discrimination.
    1. Men have higher car insurance rates than women based on their likelihood of being in an accident.
    2. Store employees do not get a discount on their store products.
    3. "Regular" and "Premium" versions of the product are introduced.
  6. Name two substitutes for a television cable company to not be a monopoly in the market.
    Topic Notes
    Definition of Monopoly

    Monopoly: a market with a single seller who sells a unique product that no other firms can produce.

    A Monopoly is a market which has the following two features:

    1. No Close Substitute: If one or more firms can produce a close substitute, then the single seller will face competition from the producers of the substitute.

    2. Barrier to Entry: are constraints that prevent or makes it extremely difficult for new firms to enter the market.

    Barriers to Entry:

    There are 3 types of barriers to entry:

    1. Natural Barrier to Entry: Economies of Scale causes one firm to be able to supply the entire market at the lowest possible cost. A natural barrier to entry creates natural monopoly.

      Monopoly natural barrier to entry
      Note: The firm realizes from the LRAC that the more outputs they produce, the lower the cost for each unit. Hence, they supply the entire market.

    2. Ownership Barrier to Entry:occurs when one firm owns a huge portion of a resource that is used to produce the good.

    3. Legal Barrier to Entry:a barrier where competition and entry are restricted by the granting of:

      1. Public franchise: exclusive right granted to a firm to supply a good or service
      2. Government license: controls entry into specific jobs, or industries
      3. Patent: exclusive right given to the inventor of a good
      4. Copyright: exclusive right given to an author or composer.

    Methods to Setting Prices to Monopoly:

    In a monopoly, the firm can set its own prices. However, they also know that the amount of quantity produces changes the market price. There are two methods to setting prices to buyers:

    1. Single-Price Monopoly: the firm sells each unit of output for the same price to all buyers.

    2. Price Discrimination: the firms sell their unit of output for difference prices to different buyers.

      Note: When firms price discriminates, their motive is to charge the highest possible price for each unit sold to gain the most profit.