Chapter 8
Market Power:
Monopoly and Monopsony
What is Monopsony?
• Mono = means “One”
+
• Psony = means “Buyer”
=
• One Buyer or One Consumer
Monopsony
Monopsony Power
Monopsony Power
Monopsony (example 1)
Monopsony (example 1… cont)
Monopsony (example 2)
Monopsony (example 2 …cont)
Monopoly
• While a Competitive firm is a price taker, a
monopoly firm is a price maker.
• One seller and many buyers:
 Implication: the seller is a price maker and
the buyers are price takers.
• A firm is considered a monopoly if:
1. It is the sole seller of its product.
2. Its product does not have close substitutes.
Quiz #1
• Assuming the competitive market price of a
good is $22 and the firm’s total cost is:
TC= 100 + 2Q + 0.1Q2
1. What is the ideal quantity to be produced to
maximize profit?
2. What is the firms Profit at the ideal quantity?
Solution to Quiz #1
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In Perfectly competitive market:
P = MC
MC= d(TC)/d(Q)=2 + 0.2Q
MC= 2 + 0.2Q
P= 2 + 0.2Q
22 = 2 + 0.2Q
 Ideal Quatity = 20/0.2 = 100
TR= 100*22 = $2200
TC= 100 + 2(100) + 0.1(100*100) = $1300
 Profit = TR – TC = 2200 – 1300= $900
Quiz #2
• In a perfect competitive market we have the
following curves for demand and supply.
• Qd= 100 – 5P
• Qs= 25P – 200
• The firm’s marginal cost is MC = Q - 20
• How much output does this firm has to
produce in order to maximize its profit?
Solution to Quiz #2
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First we find the equilibrium price:
100 – 5P = 25P – 200
30P = 300
P = $10
In a competitive market P=MC
10 = Q - 20
Q = 30