Summary 631
6.With sufficient time for entry into and exit from an in-
dustry, the long-run industry supply curveapplies.
Thelong-run market equilibriumoccurs at the inter-
section of the long-run industry supply curve and the
demand curve. At this point, no producer has an incen-
tive to enter or exit. The long-run industry supply curve
is often horizontal. It may slope upward if there is lim-
ited supply of an input, resulting in increasing costs
across the industry. It may even slope downward, as in
the case of decreasing costs across the industry. But the
long-run industry supply curve is always more elastic
than the short-run industry supply curve.
7.In the long-run market equilibrium of a competitive in-
dustry, profit maximization leads each firm to produce
at the same marginal cost, which is equal to the market
price. Free entry and exit means that each firm earns
zero economic profit—producing the output correspon-
ding to its minimum average total cost. So the total cost
of production of an industry’s output is minimized.
The outcome is efficient because every consumer with
willingness to pay greater than or equal to marginal cost
gets the good.
8.The key difference between a monopoly and a perfectly
competitive industry is that a single, perfectly competi-
tive firm faces a horizontal demand curve but a monop-
olist faces a downward-sloping demand curve. This
gives the monopolist market power, the ability to raise
the market price by reducing output.
9.The marginal revenue of a monopolist is composed of a
quantity effect (the price received from the additional
unit) and a price effect (the reduction in the price at
which all units are sold). Because of the price effect, a
monopolist’s marginal revenue is always less than themarket price, and the marginal revenue curve lies below
the demand curve.
10.At the monopolist’s profit-maximizing output level,
marginal cost equals marginal revenue, which is less
than market price. At the perfectly competitive firm’s
profit-maximizing output level, marginal cost equals
the market price. So in comparison to perfectly compet-
itive industries, monopolies produce less, charge higher
prices, and can earn profits in both the short run and
the long run.
11.A monopoly creates deadweight losses by charging a
price above marginal cost: the loss in consumer surplus
exceeds the monopolist’s profit. This makes monopo-
lies a source of market failure and governments often
make policies to prevent or end them.
12.Natural monopolies also cause deadweight losses. To
limit these losses, governments sometimes impose pub-
lic ownershipand at other times impose price regula-
tion.A price ceiling on a monopolist, as opposed to a
perfectly competitive industry, need not cause shortages
and can increase total surplus.
13.Not all monopolists are single-price monopolists.
Monopolists, as well as oligopolists and monopolistic
competitors, often engage in price discriminationto
make higher profits, using various techniques to differ-
entiate consumers based on their sensitivity to price
and charging those with less elastic demand higher
prices. A monopolist that achieves perfect price dis-
criminationcharges each consumer a price equal to
his or her willingness to pay and captures the total sur-
plus in the market. Although perfect price discrimina-
tion creates no inefficiency, it is practically impossible
to implement.Price-taking firm’s optimal output rule, p. 585
Break-even price, p. 592
Shut-down price, p. 593
Short-run individual supply curve, p. 594
Industry supply curve, p. 599
Short-run industry supply curve, p. 600
Short-run market equilibrium, p. 601
Long-run market equilibrium, p. 602
Long-run industry supply curve, p. 603
Public ownership, p. 619Price regulation, p. 619
Single-price monopolist, p. 624
Price discrimination, p. 624
Perfect price discrimination, p. 627Key Terms
Section 11 Summary