Monopoly
Chapter 7
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Monopoly Structure:
Monopoly
• Market power is the ability to alter the
price of a good or service.
• A monopoly is one firm that produces
the entire market supply of a particular
good or service.
• Since there is only one firm in a
monopoly industry, the firm is the
industry.
LO-1
7-2
Monopoly = Industry
• The firm’s demand curve is identical to
the market demand curve for the
product.
– Market demand is the total quantity of a
good or service people are willing and
able to buy at alternative prices in a given
time period.
LO-1
7-3
Price versus
Marginal Revenue
• Marginal revenue (MR) is the change
in total revenue that results from a oneunit increase in quantity sold.
• Price equals marginal revenue only for
perfectly competitive firms.
• Marginal revenue is always less than
price for a monopolist.
LO-1
7-4
Price versus
Marginal Revenue
• A monopolist can sell additional output
only if it reduces prices.
• The MR curve lies below the demand
curve at every point but the first.
LO-2
7-5
Figure 7.1
7-6
Profit Maximization
• The monopolist uses the profitmaximization rule to determine its rate
of output.
• According to the rule, a monopolist
maximizes profit at the rate of output
where MR = MC.
LO-3
7-7
Profit Maximization
• The profit maximization rule applies to
all firms:
– A perfectly competitive firm produces the
quantity where MC = MR (= p)
– A monopolist produces the quantity
where MC = MR (< p)
LO-3
7-8
Figure 7.2
7-9
The Monopoly Price
• The intersection of the marginal
revenue and marginal cost curves
establishes the profit-maximizing rate
of output.
• The demand curve tells us the highest
price consumers are willing to pay for
that specific quantity of output.
• Only one price is compatible with the
profit-maximizing rate of output.
LO-3
7-10
Monopoly Profits
• Total profit equals profit per unit times
the number of units produced.
• Profit per unit = price minus average
total cost
Profit per unit = p – ATC
• Total profit = profit per unit times
quantity
Total profit = (p – ATC) x q
LO-3
7-11
Monopoly versus
Competitive Outcomes
• A monopolist produces less and
charges a higher price than would a
competitive industry.
LO-4
7-12
Figure 7.3
7-13
Barriers to Entry
• Obstacles that make it difficult or
impossible for would-be producers to
enter a particular market.
• Examples include patents, legal
harassment, exclusive licensing,
bundled products, and government
franchises.
LO-4
7-14
Competition versus
Monopoly
• In competition, as well as in monopoly,
high prices and profits signal
consumers’ demand for more output.
• In competition, the high profits attract
new suppliers.
• In monopoly, barriers to entry are
erected to exclude potential
competition.
LO-4
7-15
Competition versus
Monopoly
• In competition, production and supplies
expand, and prices slide down the
market demand curve.
• In monopoly, production and supplies
are constrained, and prices don’t move
down the market demand curve.
LO-4
7-16
Competition versus
Monopoly
• In competition, a new equilibrium is
established, and average costs of
production approach their minimum.
• In monopoly, no new equilibrium is
established, and average costs are not
necessarily at or near a minimum.
LO-4
7-17
Competition versus
Monopoly
• In competition, economic profits
approach zero, and price equals
marginal cost throughout the process.
• In monopoly, economic profits are at a
maximum, and price exceeds marginal
cost at all times.
LO-4
7-18
Competition versus
Monopoly
• In competition, the profit squeeze
pressures firms to reduce costs or
improve product quality.
• In monopoly, there is no profit squeeze
to pressure the firm to reduce costs or
improve product quality.
LO-4
7-19
Competition versus
Monopoly
7-20
Near Monopolies
• In duopoly two firms together produce
the industry output.
• In oligopoly several firms dominate
the market.
• In monopolistic competition many
firms each have a monopoly on its own
brand image but must still contend with
competing brands.
LO-4
7-21
Redeeming Qualities
of Monopolies?
Monopolies could also benefit society.
We must consider:
• Research and Development
• Entrepreneurial Incentives
• Economies of Scale
• Natural Monopolies
• Contestable Markets
• Structure versus behavior
LO-5
7-22
End of
Chapter 7