AP Economics
Mr. Bernstein
Module 61:
Introduction to Monopoly
November 2015
AP Economics
Mr. Bernstein
Monopoly vs. Perfect Competition
• Monopolist maximizes profit where MR=MC
• Perfectly Competitive firm also maximizes profit where
MR=MC
• Monopolist sets price
• Perfectly Competitive firm is a price taker
• Monopolist has barriers to entry
• Perfectly Competitive firms have free entry and exit
• Monopolist has opportunity to earn profits in long run
• Perfectly Competitive firm will earn zero profit in long run
2
AP Economics
Mr. Bernstein
Monopoly Demand and MR
• Monopolist MR
curve is below D
curve because
they must reduce
price to sell more
• Unlike perfect
competition,
DFIRM = DINDUSTRY
3
AP Economics
Mr. Bernstein
Monopoly Profit-Maximizing P and Q
• As with perfect
competition, p is
maximized where
MR=MC
• Optimal Output
Rule – Know the
Concept, own the
Concept!
4
AP Economics
Mr. Bernstein
Monopoly Profit-Maximizing P and Q
• Monopolies create
$
inefficiencies; P>MC
• Also notice Qm is
Pm= $14
lower than Qc would
be (where D and MC Pc = $10
Intersect)
Profit = $12
MC = ATC
D
MR
Qm= 3
Output
5
AP Economics
Mr. Bernstein
Monopoly Profit-Maximizing P and Q
• With barriers to entry
$
there are no new
entrants and no
Pm= $14
adjustment to new
equilibrium with zero Pc = $10
economic profits at
long-run equilibrium
Profit = $12
MC = ATC
D
MR
Qm= 3
Output
6
AP Economics
Mr. Bernstein
Classic Monopoly Graph
• Qm is found where
MR=MC
• But Pm is found by
extending Qm
vertically to D curve
• Be sure you can
find Monopolist’s
p area
7