Four Market Model Summary: Monopoly
Four Market Model Summary: Monopoly
Was this helpful?
Hey, guys, Alright, we've done it. We've reached the end of the monopoly unit. So, let's go back to that four market model summary page that has all four models listed on it, and let's go ahead and fill in the column for the monopoly. Alright, so here, I've got just the monopoly column, let's go ahead and go and and fill it in one by one. So, we saw a monopoly has one supplier, right? There's only one for the number of firms that is the monopoly. They are the one producer of this product. So what were some examples that we talked about? We talked about utilities, something like an electricity company, right? Electricity companies, you don't usually see tons of electrical companies in the same market, right? You don't go shopping for who's gonna provide your electricity. There's generally just one firm providing for your area, right? And that's because of the natural monopoly that exists in, uh, in those types of industries, right? So, if you want more remember that natural monopoly, right? That was those big economies of scale. If you don't really remember, I'd suggest going back to that video, because that was a good topic here. Another example would be something like a prescription drug. Okay, prescription drugs, um, Is something that the government might provide a patent, right? When you create this new drug, the company creates a drug, they file a patent with the government and they're protected for 20 years. They're the only one that can produce this drug, right? So it limits competition, and it gives them monopoly power over that drug, right? And those patents, that is the incentive to research these drugs, right? If there was no patent, if they were to just research it, they find out this formula, and then everybody starts producing it. They're not gonna get any value out of it, right there. What was the point of all that research? If they're not gonna get any of the value from the research? So the patent protects the company and it gives them the incentive to do research and find new drugs for secure diseases and stuff. Okay, So let's go down barriers to entry, right, barriers to entry. We saw in perfect competition, there were none, Right? If you wanted to be a wheat farmer, you buy a farm and you start farming wheat well, in a, in a monopoly, we see that there were high barriers to entry, right? It's not easy to join a market where there's a monopoly, there was some, they either own a key resource, they're protected by the government, or they have some sort of Now natural monopoly that's keeping them as the only producer, uh, in that industry. How about the profit maximizing quantity? Well, here, again, we saw that they maximize profit by producing, where marginal revenue equals marginal cost, right? And that was the same imperfect competition. And we're going to see that in other, in other market models as well, we see that marginal revenue equals marginal cost. Is that profit maximizing point, who? How about long run profitability? Well, in a monopoly, there is the possibility possibility for long run profits. I'll put l our profits. Okay. And that's because they have that market power. They're able to limit the quantity on the market and sustain those profits. And since there's nobody who can enter the enter the market because of these barriers to entry, they can sustain those profits in the long run as well. Okay. How about the next one relationship of price and marginal revenue? Right? So, in every industry, we see that in every market structure, we see that price equals average revenue, and in perfect competition we saw that it also equaled marginal revenue as well, but in monopolies. And in every other case it's it's not the same, right? The marginal revenue curve because of the downward sloping demand that the firm faces, The marginal revenue curve is separate and it's lower than the price. Right? So, we're gonna see that the price is greater than marginal revenue, right? That's what we've seen all throughout the chapter, that demand curve is always above that marginal revenue curve. And how about last relationship of price and marginal cost? Well, we saw this as well, that price is gonna be above marginal cost as well, right? And that's where the profits are coming from to the firm. Cool. So, remember this isn't a catch all. We talked about other things in this chapter as well. So this is just a summary of those high level concepts that can help you compare and contrast between the different market structures. Okay. But there is obviously much more details that we went over throughout the lessons. Cool. Alright, let's go onto our next unit and I'll see you there.