Monopoly
These slides supplement the
textbook, but should not
replace reading the textbook
What are the four
types of markets?
 Perfect competition
 Monopoly
 Monopolistic competition
 Oligopoly
2
What is a
monopoly firm?
The only seller of a
good or service with
no close substitutes
3
What is a
monopoly market?
A market in which the
monopoly firm operates
4
What is a
barrier to entry?
Any impediment that
prevents new firms from
competing on an equal
basis with existing firms
in an industry
5
What are some
examples of a
barrier to entry?
Legal restrictions
Economies of scale
Control of essential
resources
6
Can a monopoly make
an economic profit in
the
long
run?
Yes!
Because of these
barriers to entry
7
What is a patent?
A legal barrier to entry
that conveys to its
holders the exclusive
right to supply a
product for 20 years
8
What is an innovation?
The process of turning an
invention into a
marketable product
9
When does a firm
experience
economies of scale?
When a firm increase
resources in the long
run and efficiency
increases
10
Cost per unit
Economies of Scale as Barriers to Entry
0
Exhibit 1
Quantity per period
11
What is a price
searcher?
A firm that has some control
over the price it charges
because its demand curve
slopes downward
12
What is a
single price monopoly?
A Monopoly firm that is
limited to charging the
same price for each
unit of output sold
13
What is the
monopolist’s
demand curve?
The market demand curve
14
How is the demand
curve derived for the
single price monopoly?
It’s average revenue curve
15
Dollars per unit
Monopoly Demand Loss & Gain in Total
Revenue from Selling One More Unit
P
Elastic
Unit Elastic
Inelastic
0
MR
D = AR
Q
Exhibit 3a
Quantity per period
16
Monopoly Demand Loss & Gain in Total
Revenue from Selling One More Unit
Total Dollars
$60,000
0
Exhibit 3b
Total Revenue
16
32
Quantity per period
17
What is a
natural monopoly?
Due to economies of scale,
one firm can operate at
lower average cost than
can two or more firms
18
How does the
government foster
monopolies?
Patents, trademarks,
copyrights
Exclusive government
franchises
19
What is the purpose of
patents and copyrights?
To give people and firms the
incentive to invest their time
and money into new
products and creative works
20
What is a
government franchise?
A government granted
right to be the sole seller
of a product or service
21
When does the
government grant a
franchise?
When it thinks the
market in question is a
natural monopoly
22
What are examples of a
government franchise?
The U.S. Postal Service
Local telephone service
Local electric, gas, water
utilities, garbage
collection, cable TV
23
Is a government franchise
a win-win deal for the
protected company?
Most often the
No!
government regulates
its prices and profits
24
What is the
government’s objective?
For the monopoly to
make a normal profit
25
Why is MR < P for all but
the first unit of output for
a single price monopoly?
In order to sell additional
units the firm not only has to
lower price on the last unit,
but on all previous units
26
MR is less than price for all
but the first unit of output
Q
P
TR
MR
10
11
12
13
14
5.25
5.00
4.75
4.50
4.25
52.50
55.00
57.00
58.50
59.50
3.00
2.50
2.00
1.50
1.00
Exhibit 2
27
What is TR at the 3rd unit?
Price Q
$50
$40
$30
$20
$10
2
3
4
5
6
$120
28
What is MR at the 3rd unit?
Price
Q
$50
$40
$30
$20
$10
2
3
4
5
6
$20
29
What is MR at the 5th unit?
Price
Q
$50
$40
$30
$20
$10
2
3
-$20
4
5
6
30
Short-Run Cost &
Revenue for a Monopolist
Q
P
8
9
10
11
12
5.75
5.50
5.25
5.00
4.75
Exhibit 4
TR MR TC MC +, 46.00
49.50
52.50
55.00
57.00
4.00
3.50
3.00
2.50
2.00
35.25
37.25
40.00
43.25
48.00
1.50
2.00
2.75
3.25
4.75
10.75
12.25
12.50
11.75
9.00
31
Dollars per unit
(a) Per Unit Cost & Revenue
MC
ATC
Profit
$5.25
$4.00
0
Exhibit 5a
D
=
AR
MR
10 16
32
Quantity per period
32
Total Dollars
(b) Total Cost & Revenue
TC
Maximum
Profit
$52.50
40.00
15.00
0
Exhibit 5b
TR
10 16
32
Quantity per period
33
Dollars per unit
Minimizing Losses
Loss
p
0
Exhibit 6
MC ATC
AVC
D=AR
MR
Q Quantity per period
34
When will a monopolist
shut down?
If no price covers
average variable cost
35
Can a monopolist earn
an economic profit?
YES
36
Why do monopolies often
earn zero economic profit?
Government regulation
37
How to compare perfect
competition & monopoly?
Higher prices & less
output under monopoly
Resource allocation
38
Why does a monopoly
charge a higher price and
produce a lower quantity
than perfect competition?
Because of the different
slopes of their demand
and MR curves
39
Perfect Competition & Monopoly
Dollars per unit
a
'
p
m
MCm
ATCm
c
p
MRm
0
Exhibit 7
'
Q
Q
Sc=MC=ATC
D=AR
Quantity per period
40
What is rent seeking?
Activities undertaken by
individuals or firms to
influence public policy in
a way that will distribute
income to them
41
END
Appendix
What is
price discrimination?
Selling the same good
for different prices to
different consumers as
a way to increase profit
44
Dollars per unit
Price Discrimination
High-Marginal-Value Consumer
3.00
LRAC, MC
1.00
MR
0
Exhibit 8 (a)
400
D=AR
Quantity per period
45
Dollars per unit
Price Discrimination
Low-Marginal-Value Consumer
1.50
1.00
0
Exhibit 8 (b)
LRAC, MC
'
MR
500
'
D
Quantity per period
46
Dollars per unit
a
c
Monopolist charges different
price for each unit sold,
perfect price discrimination
Profit
MC ATC
e
LATC
D=MR
0
Exhibit 9
Q
Quantity per period
47
What does producer
surplus represent for the
perfectly discriminating
monopolist?
Economic profit
48
What is deadweight loss?
A loss of consumer and
producer surplus that is
not transferred to anyone
else; it can result from the
monopolization of an
industry
49