No
Monopolies!
Monopoly versus
Perfect Competition
Demand Curves
Competitive vs. Monopoly
(a)
(b)
Competitive Firm’s Demand Curve
Price
’ Demand Curve
Monopolist’s
Price
MC
MC
D = MR
$15
D ≠ MR
0
Quantity of Output
0
Quantity of Output
A Monopoly is the sole producer
=> therefore it faces the entire
market demand curve
Marginal Revenue Handout
Demand & Marginal-Revenue
Price
$11
10
9
8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
If a monopoly wants to sell
more, it must lower price.
Price falls for ALL units sold.
This is why MR is < P.
Price = AR
Demand
Marginal
revenue
1
2
3
4
(average
revenue)
5
6
7
8
Quantity of Water
Profit Maximization
• All profit-maximizing firms set:
MR =MC
• Competitive firms:
P = MR = MC
• Monopoly firm =
P > MR = MC
Monopoly vs. Perfect Competition
• Monopolies charge a higher price & provide lower Qty
• Monopoly charges a Price > MC
– Competitive firms:
Price = MC
• Monopolies create deadweight loss to society
– Competitive firms:
no deadweight loss
Monopolist Equilibrium
Costs and
Revenue
Profit =
(P – ATC) * Qty
MC
($20 - $10) * 100 =
$1,000 profit
E1
$20 P1
Monopoly
Profit
ATC
Set MR = MC
$10 ATC
D
MR
0
Q1
100
Quantity
Sample Monopoly Equilibrium
Costs and
Revenue
Maximize Profit set MR = MC
MC
Profit = (P – ATC) * Qty
E1
P1
Monopoly
profit
ATC
Maximize Total Revenue:
Set MR = 0
ATC
D
MR
0
Q1
Quantity
Pure Monopoly Worksheet
Pure Monopoly Problem #1
Costs and
Revenue
Profit = $150 per unit
(P – ATC) * Qty
MC
($750 - $600) * 4 =
$600 profit
E1
$750P1
Monopoly
profit
ATC
Produce 4 Units
MC = MR @ $300
$600ATC
D
MR
0
Q1
4
Quantity
Worksheet Problem #2
Costs and
Revenue
Profit =
(P – ATC) * Qty
MC
$15 P1
($15 - $8) * 100 =
$700 profit
E1
Monopoly
profit
ATC
$8 ATC
D
MR
0
Q1
100
Quantity
Quick Review:
PC vs. Monopoly
Costs and
Revenue
B
Monopoly
price
Average total cost
A
Demand
Marginal
cost
Marginal revenue
0
Q
QMAX
Q
Quantity
Collusion & Cartels
• Collusion
– An agreement among firms about Qty to produce or price to charge
– Antitrust laws prohibit this behavior in USA
• Cartel
– A group of firms acting in unison
– Example: OPEC
OPEC Meeting
How to become a price setter
DeBeers Video
Graphing Supply & Demand
S2
S1
----------
P1 --------------- E1
D1
---------------------------
P2 ------------------ E2
S1
P1 --------------- E1
Q1
D1
D2
Q1 Q2
• Demand is kept artificially high & inelastic through advertising
• Supply is kept artificially low by DeBeers
• End Result: Higher prices paid & larger quantity sold