Transcript Chapter 10 PP - Part 1

SAYRE | MORRIS
Seventh Edition
CHAPTER 10
Monopoly
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Monopoly
Monopoly
• a market in which a single firm (the monopolist) is
the sole producer
• protected from new competitors by barriers to
entry
Barriers to Entry
• obstacles that make it difficult for new participants
to enter a market
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Barriers to Entry
1. technical barriers such as sole ownership of a
resource
2. legal barriers such as public franchise, licences,
patents, and copyrights
3. economic barriers caused by economies of scale
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Monopoly
• able to set price rather than having to accept the
market-determined price
• can set either price or quantity sold, but not both
• since the monopolist is the industry, it faces the
market demand for the product
• demand is a downward-sloping curve
• must decrease the price in order to sell more
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AR = TR = 54 = 18
Q
3
MR =
TR = 54 – 38 = 16 = 16
Q
3–2
1
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*Remember with perfect competition:
D = P = AR = MR
*For a monopolist:
D = P = AR
MR
*MR is a separate curve.
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• In order to increase sales, a monopolist is forced
to reduce price not just on the last units sold, but
on the whole of its output
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Monopoly
• Total revenue is maximized when the marginal
revenue is zero
• a monopolist will produce only where the demand
is elastic
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Maximizing Profit
Total Revenue Approach
• maximum profit is where the difference between total
revenue (TR) and total cost (TC) is greatest
• the maximum profit point is shown on the total profit
curve, where it occurs at the highest point.
• the maximum profit point also occurs where the slope
of TR (same as MR) equals the slope of TC (same as
MC)
• the break-even points occur where total revenue and
cost are the same
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Maximizing Profit
Marginal Revenue Approach
• profits are maximized (or losses minimized) at an
output where MR  MC
• same profit maximization rule as perfectly
competitive firms
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LO2
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LO2
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Minimizing Loss
• monopolists are not always profitable
• depends on costs – if AC curve is higher than the
demand curve at all output levels, will have a loss
• Can minimize loss using the profit maximization
rule
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Criticisms of Monopolies
1. able to make economic profits indefinitely
2. are both productively and allocatively inefficient
3. produce less and charge a higher price than a
competitive industry
4. creating a more unequal distribution of income
and wealth within society
5. using their power to practice price
discrimination
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