AP Microeconomics AMSCO Guided Notes
4.2: Monopoly
AP Microeconomics Guided Notes
AMSCO 4.2 - Monopoly
Essential Questions
- What is a monopoly?
I. Nature of a Monopoly
1. What is a monopoly and how does it differ from perfect competition in terms of price-setting and barriers to entry?
2. What is a concentration ratio and what does a ratio nearing 100 percent indicate about market structure?
A. Barriers to Entry
1. What are the four main barriers to entry that can create a monopoly?
2. How do economies of scale enable large firms to create monopolies?
B. Natural Monopoly
1. What is a natural monopoly and what conditions lead to its formation?
2. How can natural monopolies potentially offer lower prices to consumers than competitive markets despite having no competition?
II. Marginal Revenue and Demand
1. How does the relationship between marginal revenue and demand differ between perfect competition and monopoly?
2. What happens to marginal revenue when a monopoly lowers its price to sell more units?
3. At what point does a monopoly stop producing its product?
III. Profit Maximization in a Monopoly
1. How does a monopoly determine its ideal level of output to maximize profit?
2. How does a monopoly determine what price to charge for each unit?
3. What are the two methods for calculating economic profit in a monopoly?
4. Why does the demand curve slope downward in a monopoly rather than being horizontal as in perfect competition?
IV. Deadweight Loss
1. What is deadweight loss and how does it affect consumer and producer surpluses in a monopoly?
2. Why is a monopoly neither allocatively efficient nor productively efficient?
V. Regulation of Monopoly
1. Why do government policymakers typically respond to monopolies with regulation?
A. Increase Competition
1. What are antitrust laws and how do they attempt to address monopolies?
B. Regulate Prices
1. What is socially optimal pricing and why might it cause problems for regulated monopolies?
2. How can government subsidies help maintain natural monopolies while ensuring service availability?
3. What is fair-return pricing and how does it compare to socially optimal pricing?
4. How might price regulation reduce a monopoly's incentive to innovate and reduce costs?
C. Take Public Ownership
1. What is public ownership of a monopoly and what responsibilities does government assume?
2. How does the U.S. Postal Service illustrate the concept of public ownership of a monopoly?
D. Remain Uninvolved
1. Under what circumstances might government regulators decide not to intervene in a monopoly?
Key Terms
monopoly
concentration ratio
natural monopoly
antitrust laws
socially optimal pricing
fair-return pricing