Monopoly

In this episode, we move from the general theory of market structures to the specific case of the monopolist—a market with only one seller. What happens when there is no competition? We'll explore how monopolies are created through barriers to entry, such as patents or control of a key resource. You'll learn the crucial difference between price and marginal revenue for a monopolist and see how they use this to set a higher price and produce less than would be ideal for society. Finally, we'll discuss why monopolies often lead to inefficiency and a 'deadweight loss' for the economy.

Check your understanding

These are the same multiple-choice questions you will see in the Quiz section after you listen to the episode. Use them here to preview or review the answers.

What is the primary defining characteristic of a monopoly?

  1. A few large firms dominate the market.
  2. There are many small firms selling identical products.
  3. A single firm is the sole seller of a product with no close substitutes.
  4. The government owns and operates the industry.
  5. Firms can freely enter and exit the market.

A city's water supply system is often a classic example of which type of monopoly, where high fixed costs make a single producer most efficient?

  1. A government-created monopoly
  2. A patent-based monopoly
  3. A resource-based monopoly
  4. A natural monopoly
  5. A temporary monopoly

For a profit-maximizing monopolist, what is the relationship between the price (P) it charges and its marginal revenue (MR)?

  1. P is always equal to MR.
  2. P is always less than MR.
  3. P is always greater than MR.
  4. P is equal to MR only at the highest possible price.
  5. There is no predictable relationship between P and MR.

How does a monopolist determine the profit-maximizing quantity (Q) to produce and the price (P) to charge?

  1. It produces where P=MC and sets Q based on the MR curve.
  2. It produces the largest quantity possible and charges the highest price possible.
  3. It produces the quantity where MR=MC, and then sets the price based on the demand curve at that quantity.
  4. It produces where the demand curve intersects the marginal cost curve.
  5. It produces the quantity where its total revenue is highest.

The primary social cost of a monopoly, resulting from its practice of restricting output and increasing price, is known as what?

  1. Economies of scale
  2. Consumer surplus
  3. Deadweight loss
  4. Price discrimination
  5. A barrier to entry

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