Transcript Monopoly

Monopoly
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By the end of this Section,
you should be able to:
 Define monopolies and discuss how they
arise.
 Define and explain the types of
monopolies
 Find monopolies profit maximizing output
and price
 Evaluate the welfare cost of a monopoly
 Define and discuss an example of price
discrimination.
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Definition of a Monopoly
 A monopolist is the single supplier of a
good or service for which there is no
close substitute.
 The monopolist makes up the entire supply
side of the economy.
 Compare this to our definition of a
competitive firm (infinite firms of perfect
subsititutes)
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2 Properties of a Monopoly
1. There exists a barrier for other firms to enter
the market.

Natural Monopoly: A monopoly that arises
because a single firm can supply a good or
service to an entire market at a smaller cost than
two or more firms.


Exclusive right: A monopoly arises when the
government has given the exclusive right to sell
some good to one firm


Ex. Water distillery.
Ex. Patent, Licensing Fee
Ownership of resources: A monopoly arises when
the monopolist has sole access to resources
without a close substitute.

Ex. Lime Stone
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2 Properties of a Monopoly
2. Monopolist is a price searcher.
 Price and quantity changes by the
monopolist has a big effect on the market.
 The monopolist faces the entire industry’s
demand.
Competitive Market Marginal
Revenue
Price
Monopolist Market Demand
and Marginal Revenue
Price
MR
MR
Quantity
Marginal Revenue is horizontal
because price is set by market forces.
Demand
Quantity
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Because monopolist sets P and Q, demand
and marginal revenue is the industry’s curve.
Profit maximizing Q and P for
a Monopolist: 2 approaches
1. TR – TC Approach
 The Monopolist’s Profit Maximizing P and Q is
where Profit = TR – TC is the highest.
2. MR = MC Approach
 Note: Monopolist MR is ALWAYS < P
 Here’s an example: Suppose a monopolist supplies
3 units of a good at a price of 8 and 4 units of a
good at a price of 7.
 P1=7, Q1=4 and P2=8, Q2=3
 MR = TR = P1*Q1 – P2*Q2 = 28 – 24 = 4
Q
Q1 – Q2
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 MR of the 4th unit=4<7=P of selling 4 units
Profit maximizing Q and P
for a Monopolist
 MC = MR for a Monopolist graphically
Price/Cost
MC
ATC
Monopolist Profit = TR–TC
= (Pm*)Qm*-(ATC at QM*)Qm*
= (Pm*-ATC at Qm*)(Qm*)
Pm*
Economic Profit
ATC at Qm*
MC=MR
MR
Qm*
Demand
Quantity
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Social Cost of a Monopoly as
compared to a Competitive
Market
Competitive Market
Monopoly
Price/Costs
Price/Costs
MC=Supply
MC ATC
CS
Pm*
CS
P*
MR
ATC at Qm*
PS
DWL
PS
Demand
Q*
Quantity
MR
Qm*
Demand
Quantity
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Price Discrimination
 One way a monopolist causes a social cost is by price
discrimination. For example: Movie Theatres
 Price Discrimination is selling a given product at more than
one price, with the price difference being unrelated to
differences in cost.
 A price discriminating monopolist charges some customers
more than others based upon personal preferences of the
monopolist.
 Required Conditions for a Monopolist to charge
different prices
 Firm must face a downward sloping demand curve
 Firm must be able to separate and identify buyers
 Firm must be able to prevent resale of the product
 In a competitive market, buyers are charged the same
price for a couple of reasons:
 Market sets the P
 Goods are homogenous between all of the sellers
 We assume buyers have full knowledge
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