Transcript Economics, by R. Glenn Hubbard and Anthony Patrick

Principles of Microeconomics:
Econ102
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Monopoly:
The only seller of a good or service that does
not have a close substitute.
Barriers to entry may be high enough to keep out competing firms for four
main reasons:
1.
Government Action.
2.
Control of key resources.
3.
Vertical Integration.
4.
Continual Innovation
5.
Natural monopoly.
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A situation in which economies of scale are so large that one firm can
supply the entire market at a lower average total cost than can two or
more firms.
Average Total Cost Curve for a
Natural Monopoly
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A monopoly maximizes profit by producing where:
MR = MC
Price Maker:
A situation in which the firm has the ability to set or control
prices, thus exhibiting market power or, the ability to charge a
price greater than marginal cost.
If price makers raise their prices, they will lose some, but not
all, of their customers. Therefore, they face a downward sloping
demand curve.
A monopoly’s demand curve is the same as the demand curve
for the product.
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A monopoly maximizes profit by producing where:
MR = MC
Remember that when a firm cuts the price of a product, one good
thing and one bad thing happens:

The good thing: It sells more units of the product.

The bad thing: It receives less revenue from each unit than it
would have received at the higher price.
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Finding Profit Maximizing Price and Output for a Monopolist
MARGINAL
TOTAL
REVENUE
PRICE QUANTITY REVENUE (MR = ΔTR/ΔQ)
$
$–
TOTAL
COST
MARGINAL
COST
(MC = ΔTC/ΔQ)
$56
$–
$17
3
$16
4
63
$15
5
71
$14
6
80
$13
7
90
$12
8
101
Don’t Assume That Charging a Higher Price Is Always More Profitable For a Monopolist
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Calculating a Monopoly’s Revenue
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Profit-Maximizing Price and Output for a Monopoly
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What Happens If a Perfectly Competitive Industry Becomes a Monopoly?
Conclusion:
A monopoly will produce less and charge a higher price than would
a perfectly competitive industry producing the same good.
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The Inefficiency of Monopoly
We can summarize the effects of
monopoly as follows:
 Monopoly causes a
reduction in consumer
surplus.
 Monopoly causes an
increase in producer
surplus.
 Monopoly causes a
deadweight loss, which
represents a reduction in
economic efficiency.
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
In pure monopoly, because of the high barriers to entry,
economic profits can be earned in the long-run as well.
 At the expense of competition

Monopolies do not have as strong of an incentive to be efficient
as there is no competitor who could drive them out of business.

No productive efficiency in the long-run
 Except by coincidence, a monopoly company will produce at
a higher cost per unit than would be found in a competitive
company in the long-run.

Allocative Ineffficiency
 Too little of the product is being produced from society’s
point of view
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Antitrust Laws and Antitrust Enforcement
Antitrust laws:
Government policies / laws that deal with monopolies and
collusion. Should promote competition among firms.
Collusion:
An agreement among firms to charge the same price, or to
otherwise not compete.
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Antitrust Laws and Antitrust Enforcement
Important U.S. Antitrust Laws
LAW
DATE PURPOSE
Sherman Act
1890 Prohibited “restraint of trade,” including price fixing
and collusion. Also outlawed monopolization.
Clayton Act
1914 Prohibited firms from buying stock in competitors and
from having directors serve on the boards of competing
firms.
Federal Trade
Commission Act
1914 Established the Federal Trade Commission (FTC) to
help administer antitrust laws.
Robinson-Patman Act
1936 Prohibited charging buyers different prices if the result
would reduce competition.
Cellar-Kefauver Act
1950 Toughened restrictions on mergers by prohibiting any
mergers that would reduce competition.
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