Monopoly
Monopoly
Opposite of PC
 Occurs when output of entire industry is
produced and sold by a single firm
referred to as Monopolist

Characteristics of
Pure Monopoly





Single supplier – the firm and the industry are the
same.
No close substitutes – the product is unique and
unlike any others.
Price maker – the firm has considerable control over
price since it controls the total quantity supplied.
Blocked entry – barriers to entry exist because
there is no immediate competition.
Example railways in Pakistan , PTCL was once a
monopoly
Barriers to Entry
 Economies
of Scale
 Legal Barriers to Entry
◦ Patents[ gives right to a firm to produce a
product for a given time period]
◦ Licenses[ govt gives licenses e.g. TV
channels]
 Ownership
or Control of Essential
Resources [e.g. gas reserves]
Price Maker

Monopoly Price-Setting Strategies
◦ For a monopoly firm to determine the quantity it sells, it
must choose the appropriate price.
◦ There are two types of monopoly price-setting strategies:
◦ A single-price monopoly is a firm that must sell each
unit of its output for the same price to all its customers.
◦ Price discrimination is the practice of selling different
units of a good or service for different prices.
Single price monopolist
PROFIT DETERMINATION
COMPARING COSTS AND
REVENUES
A single price Monopolist
Cost and Demand curve
 The cost curves[ AVC, ATC] of
monopolist are U shaped just like PC
firms, because cost depend on law of DR
not market structure
 Monopoly firm is sole the supplier so it
faces downward sloping demand, tradeoff
between D and P
A single price Monopolist
Average Revenue
 When monopoly charges same price over
all units sold, AR is identical to price.
 The market demand curve is also firm AR
curve
 AR= TR/Q= [P x Q]/Q so Q cancels out
and

hence AR= P for single price monopoly
A single price Monopolist

Price and Marginal Revenue
◦ MR from sale of additional unit of production
will be below demand curve
◦ Since the demand curve is negatively sloped
hence the prices must be lowered on all units
to sell an extra unit.
Price and Marginal Revenue
Marginal Revenue is Less Than Price
• A Monopolist is
Selling 3 Units at
$142
• To Sell More (4),
Price Must Be
Lowered to $132
• All Customers
Must Pay the Same
Price
• TR Increases $132
Minus $30 (3x$10)
$142
132
122
112
Loss = $30
D
102
Gain = $132
92
82
0
1
2
3
4
5
6
Price and Marginal Revenue
Marginal Revenue is Less Than Price
• A Monopolist is
Selling 3 Units at
$142
• To Sell More (4),
Price Must Be
Lowered to $132
• All Customers
Must Pay the Same
Price
• TR Increases $132
Minus $30 (3x$10)
• $102 Becomes a
Point on the MR
Curve
• Try Other Prices to
Determine Other
MR Points
$142
132
122
112
Loss = $30
D
102
Gain = $132
92
82
MR
0
1
2
3
4
5
6
The Constructed Marginal Revenue Curve
Must Always Be Less Than the Price
Total, Average and Marginal Revenue
Price
P=AR
Quantity
Total Revenue
TR= T x Q
Marginal
Revenues
9.1
9
81.9
9
10
90
8.1
8.9
11
97.9
7.9
Price elasticity and MR
As noted earlier, since the demand curve
facing a monopoly firms is downward
sloping, MR < P
 MR > 0 when demand is elastic
 MR = 0 when demand is unit elastic
 MR < 0 when demand is inelastic

Monopoly Revenue and Costs
Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist
$200
Demand and Marginal Revenue Curves
Elastic
Inelastic
Price
150
100
50
0
MR
2
4
$750
Total Revenue
D
6
8
10
12
Total-Revenue Curve
14
16
18
500
250
0
TR
2
4
6
8
10
12
14
16
18
SR Monopoly equilibrium

1.
2.
Two rules apply
Produce or Not [ if monopolist cannot
cover SR variable costs then shut down]
If the firm does produce then MC = MR,
the monopolist is maximizing profit.
MC= MR
Because MR< P for a monopoly then
 MR=MC< P
 When monopoly firm is in profit
maximizing equilibrium ,its MC is always
less than price it charges.

MR = MC Determines the ProfitMaximizing Output**
Elasticity and revenues
 Monopolist always produce where
demand is elastic , MR is positive
 A profit maximizing monopoly will never
sell in the range where demand is inelastic

Monopoly profits
Three possibilities
 economic profits
 Zero profits
 Losses

Profit Maximization
$200
By A Pure
Monopolist
Price, Costs, and Revenue
175
MC
150
125
100
75
Pm=$122
Economic
Profit
ATC
D
A=$94
MR=MC
50
25
0
MR
1
2
3
4
5
6
Quantity
7
8
9
10
Zero-profit monopolist
Loss Minimization
By A Pure Monopolist
Price, Costs, and Revenue
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
Qm
Quantity
Economic Effects of Monopoly
Price, Output, and Efficiency
Pure
Monopoly
Purely
Competitive
Market
S=MC
MC
Pm
P=MC=
Minimum
ATC
Pc
b
c
Pc
a
D
Qc
MR
Qm
Qc
Pure Competition is Efficient
Monopoly Price is Greater Than MC
And Is Therefore Inefficient
D
Supply for monopoly
We are not equating p=MR= MC like we
did in PC
 For a monopoly firm there is no unique
relationship between markept price and
quantity supplied
 Figure 13.5

Multi-plant monopolist
How to allocate production between two
or more plants?
 The given output will be allocated where
the MC of plants equate
 Plant A MC=20 producing 30units
 Plant B MC=17 producing 25 units
 Cost reduce by 3 if you reallocate


Overall MC for multi plant is the sum of
MC curves for its individual plants
Long Run
Due to barriers to entry no firm can
enter the market
 If monopoly has losses in SR then it can
shut down in LR if they are unable to
cover Variable costs
 If profits are earned in SR , they can
continue in the LR also due to barriers to
entry
