Introduction
to Economics:
Social Issues
and Economic
Thinking
Wendy A .
Stock
CHAPTER 18
COMPETITION AND MONOPOLY
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AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
Understand how firms
determine the optimal
level of output
Demonstrate the
differences in output
choices between firms
in perfect competition
and monopoly
Compare profits for
perfectly competitive
firms and monopolies
Copyright © 2013 John Wiley & Sons, Inc.
Assess the economic
efficiency of firms in
perfect competition
versus monopolies
Understand why
some economists
argue for regulation
of monopoly power
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PROFITS AND COSTS
Profit is the difference between total
revenue and total cost.
Total Costs include the direct costs and
opportunity costs associated with producing
a given level of output.
Marginal Cost is the change in total cost
incurred when an additional unit of output is
produced.
∆𝑻𝑪
𝑴𝑪 =
∆𝑸
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COSTS OF PRODUCTION
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OUTPUT AND REVENUE
 Total Revenue (TR) is the amount of money
earned when a supplier sells a given quantity
of a good. It is equal to the price of the good
(P) multiplied by the quantity of the good
sold (Q).
TR = P * Q
 Marginal Revenue (MR) is the change in
total revenue earned when an additional unit
of output is produced and sold.
∆𝑻𝑹
𝑴𝑹 =
∆𝑸
Copyright © 2013 John Wiley & Sons, Inc.
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OUTPUT AND REVENUE
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THE PROFIT-MAXIMIZING OUTPUT LEVEL
The Profit-maximizing Output Level for a
firm occurs where MR = MC.
If MR > MC , increasing output will increase
profits.
If MR < MC , decreasing output will increase
profits.
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THE PROFIT-MAXIMIZING OUTPUT LEVEL
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THE PROFIT-MAXIMIZING OUTPUT LEVEL
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PERFECT COMPETITION
Perfect Competition is a market
characterized by many firms producing
identical products for a large number of
buyers. Buyers and sellers have complete
information about prices, and firms can
easily enter or exit the market.
 Identical products
 Complete information
 Many buyers and sellers
 Easy entry and exit
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PRICE TAKER AND MARGINAL REVENUE
Price Taker are firms that cannot set the
price of their good, but instead must take
the market price as given.
A perfectly competitive firm:
 is a price taker
 sells all its products at the same price
 MR = P
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PERFECT COMPETITION MARKET AND FIRM
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NORMAL PROFIT AND
ECONOMIC PROFIT
Normal Profit is the profit that business owners
could earn if they applied their resources and
skills in their next best business alternative.
Normal profit is total revenue minus total cost,
including opportunity cost.
Economic Profit occurs when a firm earns more
than $0 in normal profits.
A firm owner earning economic profit earns
more than she would if she chose her next best
alternative.
Copyright © 2013 John Wiley & Sons, Inc.
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MONOPOLY
A Monopoly is a market with only one seller
of a good or service.
In the early 1900s, De Beers controlled 90
percent of the world ’s diamond mines and
production
Monopolies arise because barriers to entry
Barriers to Entry are obstructions that make
it difficult for new firms to enter a market.
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PRICE SETTERS
A monopolist is a price setter.
Price Setters are firms that are able to set
the prices for their products.
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15
MARKET DEMAND AND
MARGINAL REVENUE UNDER MONOPOLY
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DEMAND AND MARGINAL REVENUE UNDER
MONOPOLY
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PROFIT-MAXIMIZING OUTPUT
FOR MONOPOLY FIRMS
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COMPARING PERFECT COMPETITION
AND MONOPOLY
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PERFECT COMPETITION, MONOPOLY,
AND EFFICIENCY
Resource allocative e fficiency results from
the situation where MB = MC for the society
Under Perfect Competition
MB = P = MR = MC Efficient
Under Monopoly
MB = P > MR = MC Inefficient
At the level of output Q*(m), MB = P > MC
implies room for improving efficiency
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MONOPOLY REGULATION
Antitrust Laws are laws that promote
competition between businesses and
prohibit anti-competitive behavior by firms
with large control over markets.
 Sherman Anti-Trust Act
 Clayton Anti-Trust Act
 The Federal Trade Commission
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QUESTIONS/DISCUSSIONS
1. Why is the price for a perfectly
competitive firm equal to marginal
revenue but the price for a monopoly
firm greater than marginal revenue?
2. Can a monopolist charge whatever it
wants for its product? Why or why
not?
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KEY CONCEPTS
• Monopoly
• Profit
• Total costs of
production
• Marginal costs of
production
• Total revenue
• Marginal revenue
• Profit-maximizing
output level
Copyright © 2013 John Wiley & Sons, Inc.
•
•
•
•
•
•
•
Perfect competition
Price takers
Normal profit
Economic profit
Barriers to entry
Price setters
Antitrust laws
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