Monopoly: a single seller of a good with no close substitutes - monopolies emerge for the following reasons

• control of inputs: firms seek exclusive rights to their inputs in order to prevent other firms from making a similiar or substitute product
• patents: governments issue incentives for innovation - firms seek them in order to prevent other firms from producing similiar products
• government liscensing: governments often draft laws making it difficult for firms to break into certain industries - if a firm had political control, it could prevent others from setting up shop in their market
• natural monopoly: when minimum efficient scale is large enough that there isn't room for 2 or more firms to produce at MES, a natural monopoly results

- minimum efficient scale (MES): the smallest quantity at which the long run average cost curve for a firm is no longer decreasing

- if two or more firms produced at MES, demand would be insufficient and a surplus would result in losses

- if two firms produced at quantities below MES, one firm could always increase production, lowering AVC and crowding out the other with price pressure


Single Price Monopoly: a single price monopoly maximizes profits when marginal revenue equals marginal cost. Since marginal revenue for a monopolist is downward sloping, off of a downward sloping demand curve,

• Assumptions:
  
  
  • Completeness: Consumers always make up their minds. Either they prefer bundle A to bundle B, they prefer bundle B to bundle A, or they are indifferent between the two.
  • Transitivity: If a consumer prefers A to B, and if the consumer prefers B to C, then he or she prefers bundle A to bundle C. Stated differently, if the consumer is indifferent between both A and B, and if he or she is also indifferent between B and C, then the consumer is indifferent between A and C.
  • Monotonicity: More is better. Consumers prefer more of any quantity to less. (note: this assumption will not hold if one or both goods in the bundle cause disutility)

Indifference Curves: a way to graphically and mathematically represente preferences. Given the form u(x,y) = K, indifference curves are drawn for various levels of K such that points A & B lying on one particular curve yield the same utility. Because all points on an indifference curve represent bundles for which the consumer has the same utility, the consumer is indifferent between these bundles.

Indifference Map: consists of various indifferences curves that show different level curves of a utility function

General Equation for Indifference Curves:

• K = ordinal utility value - the actual number that K corresponds to for each indifference curve doesn't matter - all that matters is the ranking, (is A < B, etc)
  
  

• according to above diagram, A < B < C and thus, bundles that make up the indifference curve u(x,y) = C are more desirable than bundles that make up u(x,y) = A or bundles that make up u(x,y) = B
  
  

• Properties of Indifference Curves:
  
  

  1. Indifference curves cannot have thickness
  2. Distinct indifference curves can never intersect
  3. If more is better, indifference curves must slope downwards

• Slope of the Indifference Curve:
  
  - MRSxy = marginal rate of substitution - the maximum amount of Y you are willing to sacrifice to get an extra unit of X, remaining indifferent or keep the same utility
  - MUx = marginal utility gained from the consumption of X
  - MUy = marginal utility gained from the consumption of Y
  
  

• Diminishing Marginal Returns:
  
  - as X gets bigger, MRSxy dimishes
  - this means essentially, the more X and less Y you have, the less willing you become to substitute X for Y
  

Families of Indifference Curves:

• Perfect Substitutes: indifference curves have same slope everywhere, because MRSxy is constant everywhere - at endpoints, 0 units of X and 4 units of Y yields the same amount of utility as 4 units of X and 0 units of Y

• Perfect Compliments: goods should be consumed in fixed ratios - like milk and cereal - use a min function to create an L shaped curve

• One good is a bad: if a good is a bad, or if it yields negative utility from consumption, in order for the consumer to remain indifferent, he or she must consume more of the positive utility yielding good. Thus, indifference curves are uncharacteristically drawn with positive slopes.

• Satiation: there is a point of satiation, where a specified amout of x and y consumed yields the highest utility possible - the indifference curves spread out around that point in a circular or elliptical fashion, and utility increases as the curves get closer and closer to the satiation point.

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