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Legal barriers are created by government action and include; (1) public franchise, (2) patent, (3)
copyright, (4) license, and (5) trade restrictions. Economies of scale occur when a firm’s average
total cost decreases as the scale of its operation increases. A natural monopoly is an industry in
which economies of scale are so important only one firm can survive. If one or a few firms have
exclusive ownership of an essential resource, this blocks the entry of new firms into the market.
A monopoly has maximum market power. Thus, a monopoly faces a downward sloping demand
curve. As a result, price and marginal revenue are not the same. Any time a firm faces a
downward sloping demand curve, its marginal revenue curve will be twice as steeply downward
sloping as its demand curve.
A monopoly, like a perfect competitor, will maximize profits by producing the quantity of output
where marginal revenue equals marginal cost. In comparison to perfect competition, monopoly
results in less output at a higher price. In comparison to perfect competition, monopoly is
inefficient because it results in a quantity of output where price exceeds marginal cost, and thus
where marginal social benefit exceeds marginal social cost.
Monopoly can also result in socially wasteful rent seeking, which occurs when people use
resources to manipulate public policy in order to redistribute income to themselves from others.
Due to the lack of competitive pressure, monopoly producers tend to be; (1) less responsive to
consumer demand, and (2) less diligent to minimize costs of production.
Price discrimination occurs when a seller charges different prices to different buyers for the same
good. Price discrimination allows a firm to increase its profits by gaining some of the consumer’s
surplus.
Questions for Chapter 22
Fill-in-the-blanks:
1. ______________________ is a firm that is the lone seller of a product with no close
substitutes.
2. ______________________ to entry are factors that block the entry of new firms into a
market.
3. A ______________________ is a government granted monopoly on the production and
sale of an invention granted to the inventor.
4. A ______________________ is a government granted monopoly on the production and
sale of a creative work granted to the creator.
5. A ______________________ is a permit issued by the government authorizing a
person to conduct a certain type of business.
6. Economies of ______________________ occur when a firm’s average total cost decreases
as the scale of its operation increases.
7. A(n) ______________________ ______________________ is an industry in which
economies of scale are so important only one firm can survive.
8. ______________________ seeking occurs when people use resources to manipulate
public policy in order to redistribute income to themselves from others.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
9. ______________________ ______________________ occurs when a seller charges
different prices to different buyers for the same good.
22 - 11 Monopoly