Monopoly
This firm is now the ultimate market power in
the galaxy
Monopoly = Market
O The lack of direct competition means that a
monopoly behaves differenty than does a firm
in a competitive market
O In monopoly situations, the demand curve
facing the firm is the same as the market
demand curve.
Price vs Marginal Revenue
O FOR FIRMS IN COMPETITIVE MARKETS:
O Price = Marginal Revenue
O When the price is set by the market, the additional
revenue from one more unit of output is the same as
the market price
O FOR MONOPOLY FIRM:
O Price > MR
O When a monopoly firm selects its output level, it is
subject to the Law of Demand
O In order to sell additional amounts of output, the price
must decrease
O The MR curve will be below the price curve at every
point except the first
Profit Maximization
O In addition to making a decision on output,
monopoly firms must make a pricing
decision as well.
O General Profit Maximization Rule
O When MR = MC profit is maximized
Monopoly Price & Profits
O The profit maximizing rate of output is found
at the intersection of the marginal revenue
and marginal cost curves
O The highest price consumers are willing to
pay for a specific quantity of output is
established by the demand curve
O Only ONE price maximizes profit
Barriers to Entry
O Threat of Entry
O Monopolies attain higher prices and profits by
limiting output
O This power depends on oother firms not entering
the market
O Types of Barrier to Entry:
O
O
O
O
O
Patent Protection
Legal Harassment
Exclusive Licensing
Bundled Products
Government Franchises
Comparative Outcomes
O Monopoly vs Competition
O See chart on pg 156
O Monopoly vs Duopoly
O Monopoly vs Oligopoly
O Monopoly vs Monopolistic Competition
Defenses of Monopoly
O Entrepreneurial Incentives
O Economies of Scale
O Natural Monoplies
O Contestable Markets
O Structure vs Behavior
Practice Problems for
Homework
O Page 166
O Problems # 2, 4, 6, 7, 8