Chapter 15

Chapter 15 dealt with monopolies. Monopolistic firms are price givers, not price takers, because they can manipulate the price of the good through the quantity they supply because they are essentially the market. There are three ways that monopolies are created, through a restriction on resource access, through government given power, and because natural monopolies are more efficient. Natural monopolies occur when there is a monopoly because of an economy of scale. If the ATC of a single large firm keeps decreasing the more quantity it sells, then it becomes difficult for new firms to enter the market and try to overthrow the large firm, so the large firm maintains market power. In order to maximize profit, a monopolistic firm find the point where MC=MR and produces that particular quantity. However, instead of choosing to charge MR and gain zero economic profit, they charge the price along the demand curve which is significantly higher, gaining a positive economic profit. The invisible hand would choose the point where MC(firm's supply curve)=Demand curve because that is equilibrium, but a firm chooses to produce at the point where MC=MR, causing inefficiency and dead weight loss. There are a couple of methods that the government can take to try to regulate monopolies like not allowing mergers and splitting large companies, regulating pricing, and having the government itself be the market for monopolies such as water and electricity. The government can also do nothing because, in reality, no market is perfectly competitive, it is always a matter of how imperfect a market is, and that factor can be less than the imperfection of government involvement thanks to corruption. Therefore, at times, it is better for the government to not intervene at all.