MICROECONOMICS: Theory & Applications
Chapter 11 Monopoly
By Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
9th Edition, copyright 2006
PowerPoint prepared by Della L. Sue,
Marist College
Learning Objectives
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Define monopoly and show what a monopolist’s
demand and marginal revenue curves look like.
Explain why a monopolist’s profit-maximizing output
is where marginal revenue equals marginal cost.
Describe why the extent to which a monopolist’s price
exceeds marginal cost is larger the more inelastic the
demand faced by the monopolist.
(Continued)
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Learning Objectives (continued)
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Understand why the shutdown condition applies to
monopolies as well as to firms operating in a perfectly
competitive market.
Outline the potential sources of monopoly power:
absolute cost advantages, economies of scale,
product differentiation, and regulatory barriers.
Explore the efficiency effects of monopoly from a
static as well as a dynamic perspective.
Overview public policy toward monopoly.
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Terminology
 Monopoly – a market with a single seller
 Monopoly power – some ability to set price
above marginal cost
 Price maker – a monopoly that supplies the
total market and can choose any price along
the market demand curve that it wants
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The Monopolist’s Demand Curve
and Total Revenue
[Figure 11.1]
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Profit-Maximizing Output of a
Monopoly
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Marginal revenue is
always less than price
when the demand
curve slopes
downward.
Profit is maximized
where MR=MC.
Figure 11.2
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The Monopoly Price and Its
Relationship to Elasticity of Demand
P = MC/[1 – (1/η)]
The smaller the demand elasticity, the greater the
profit-maximizing price, relative to marginal
cost.
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Further Implications of Monopoly
Analysis
 A monopoly has no supply curve.
 A monopoly does not necessarily make
positive economic profit.
 A monopoly’s demand curve is elastic where
marginal revenue is positive.
 A profit-maximizing monopolist will always sell
at a price where demand is elastic.
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Monopoly and the Shutdown
Condition
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[Figure 11.5]
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Monopoly Demand, Marginal Revenue,
and Total Revenue
[Figure 11.6]
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Measuring Monopoly Power
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Lerner Index – a means of measuring a firm’s
monopoly power that takes the markup of price over
marginal cost expressed as a percentage of a
product’s price:
Lerner Index = (P – MC)/P
The Lerner index varies between zero and one.
The larger the Lerner index value, the greater a firm’s
monopoly power.
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Sources of Monopoly Power
 What factors determine the extent to which a
firm has monopoly power?
– The elasticity of the market demand curve
 If the market demand curve is perfectly elastic, any
individual supplier has no monopoly power.
– The elasticity of supply by other firms
 The monopoly power of any one firm is more limited when
there is a greater number of rival firms.
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Barriers to Entry
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Barrier to entry – any factor that limits the number of firms
operating in a market and thereby serves to promote monopoly
power
Categories:
– Absolute cost advantage
 A situation in which an incumbent firm’s production cost (longrun average total cost) is lower than potential rivals’ production
costs at all relevant output levels
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Economies of scale
 A situation in which the long-run average total cost curve for all
firms slopes downward over the entire range of market output
 Natural monopoly
(Continued)
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Barriers to Entry (continued)
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Product differentiation
 A means by which consumers may perceive the product
sold by an incumbent firm to be superior to that offered by
prospective rivals.
Regulatory barriers
 Barriers to entry created by the government through vehicles
such as patents, copyrights, franchises, and licenses
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Strategic Behavior by Firms:
Incumbents and Potential Entrants
[Figure 11.8]
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The Efficiency Effects of Monopoly
[Figure 11.9]
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A Dynamic View of Monopoly and
Its Efficiency Implications
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Static analysis – a form of
economic analysis that
looks at the efficiency of a
market at any one point in
time
Dynamic analysis – a form
of economic analysis that
looks, over time, at the
efficiency of a market
Figure 11.10
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Public Policy Toward Monopoly
 Antitrust laws – a series of codes and
amendments intended to promote a
competitive market environment
 3 major statutes:
– Sherman Act (1890)
– Clayton Act (1914)
– Federal Trade Commission Act (1914)
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Regulation of Price
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Price ceiling –
eliminates the
monopolist’s reason for
restraining output
Figure 11.11
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