It's got three different short topics.
1) Elasticity.
Hopefully you remember when we looked at Elasticity that a straight, downward sloping line actually has three types of elasticity. The upper, left side of the line is elastic. The lower right side of the line is inelastic. And somewhere there will be a Unit Elastic tipping point.
Remember when we measure elasticity, we aren't actually measuring the line. We are measuring the movement along the line. Thus there isn't a Unit Elastic Zone. Instead it is one spot.
If we move along the line in a way that has equal amounts of distance on both sides of the Unit Elastic point then the answer will be Unit Elastic. However, if more of the movement is on either side, then the result will be whichever side has more of the movement.
On our monopoly graph, the Demand line on our MACG graph is a downward sloping line. Thus the monopoly will have a portion of its demand line that is elastic and a portion that is inelastic. But how do we find the Unit Elastic tipping point?
It ends up being exceedingly easy to find. We just look for the place where MR is 0. If we go straight up from that point until we hit the Demand line, that will be the place where the line shifts from Elastic to Inelastic.
Economies of Scale (EOS) is the idea that we can minimize our costs in the long run by harnessing the power of going big. Remember how we look at the example of someone starting up a car manufacturing business. We saw that even though there were millions of dollars in startup costs we could effectively minimize the problem by producing a lot of units. ($500,000,000 in startup costs seems like a lot. But if we produce a million units, that is only $500 per item.)
When looking at a Long Run Average Total Cost Curve (LRATC) the downward sloping portion of the line is the EOS.
It works the same way for a monopoly. In fact the idea of EOS is sometimes why the market is a monopoly.
Imagine an industry that has very high startup costs. It's LRATC does have a downward sloping EOS section, but it slopes downward very slowly over a long stretch. It might look something like this:
Notice how increasing our quantity does not really get us a huge benefit. Unlike the car example above, increasing our quantity a lot only gives us a very slight benefit in cost reduction.
Without cluttering our graph with a bunch of lines, imagine that the market wants a set number of units of this product. Let's pretend the market wants 1000 units. If one person makes all of the units they will barely make enough money to earn a very small profit. On the graph they would be a very tiny amount above the LRATC. Like this:
What would happen if there were a second firm in the market and each of them only got to sell 500 units?
At 500 units we are now under the LRATC and are losing money.
Suddenly what was a profitable industry for 1 firm, is now a losing industry for both.
It simply doesn't make sense to have more than one firm in the industry.
This is a "Natural Monopoly".
I don't have any work for you based on these concepts. Use today to finish up any of your old items that you haven't yet completed.
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