Transcript Monopoly
Monopolies Definition, Causes & Pricing Chapter 15 Monopoly Market Characteristics • One Seller • Unique Product—no substitutes • Difficult/Impossible to enter or leave industry • Limited Information • Great deal of price control— Price Setters WHY DO MONOPOLIES ARISE? • The fundamental cause of monopoly is Barriers to Entry • 3 primary sources of barriers: 1) Ownership of a key resource 2) Government gives one firm the exclusive right to produce 3) Costs of production make a single producer more efficient Natural Monopolies • natural monopoly- when a single firm can supply a good or service at a smaller cost – develop in industries with large economies of scale Cost Qty Produce Utilities: ATC Electricity, Gas & Water Average total cost 0 Quantity of Output Demand Curves Competitive vs. Monopoly (a) ’ Competitive Firm’s Demand Curve Price Price (b) Monopolist’s Demand Curve Demand Demand 0 Quantity of Output 0 Quantity of Output A Monopoly is the sole producer => therefore it faces the market demand curve A Monopoly’s Revenue • When a monopoly increases the amount it sells, it has 2 affects on total revenue: (P * Qty) – 1) The output effect—more output is sold, Qty – 2) The price effect—price falls, P Notice that: P > MR 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 (average revenue) Marginal revenue 1 2 3 4 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 Profit Maximization Costs and Revenue Step #2: The demand curve shows the price consistent with this quantity. Step #1 Find Profit Max. Level MR = MC B Monopoly price Average total cost A Demand Marginal cost Marginal revenue 0 Q QMAX Q Quantity The Monopolist’s Profit Costs and Revenue Profit = Marginal cost $20 Monopoly E B price Monopoly profit $10 Average D total (P – ATC) * Qty ($20 - $10) * 200 = $2,000 profit Average total cost C cost Demand Marginal revenue 0 QMAX 200 Quantity Worksheet • Pure Monopoly