CHAPTER 24

Monopoly

©2016 Cengage Learning. All Rights Reserved. May not be scanned,

copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
 INTHISLECTURE

 The Theory of Monopoly

 Monopoly Pricing and Output

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 2
 MONOPOLY
4 assumptions in
competitive firms:
 A theory of market 247628T, 227948W
structure based on three
assumptions: 1.
1. There is one seller
2. It sells a product for 2.
which no close
substitutes exist
3.
3. There are extremely
high barriers to entry
4.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 3
 BARRIERS TO ENTRY

 Legal barriers
 Economies of scale
 Exclusive ownership of a necessary
resource

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 4
 LEGAL BARRIERS TO ENTRY

 Public franchises - A right granted to a

firm by government that permits the
firm to provide a particular good or
service and excludes all others from
doing the same
 Patents – granted to inventors of a
product or process for a period of 20
years
 Government licenses – required to
carry on a business or occupation.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 5
 ECONOMIES OF SCALE
 Economies of scale – Exist when inputs are
increased by some percentage and outputs
increase by a greater percentage causing unit
costs to fall.
 Natural monopoly - The condition where
economies of scale are so pronounced that
only one firm can survive.
- A natural monopoly occurs when the most efficient
number of firms in the industry is one. A natural
monopoly will typically have very high fixed costs
meaning that it impractical to have more than one
firm producing the good. An example of a natural
monopoly is ………..
CH 24 • 6
 MONOPOLIST IS A PRICE SEARCHER

 Price Searcher - A Competitive Firms

seller that has the price
ability to control to (247629T,231141W)
some degree the
price of the product it
sells.
 The monopolist seeks
a price which
maximizes profit.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 7
 MONOPOLIST’S DEMAND CURVE

 The monopoly firm is the industry, and the Competitive

industry is the monopoly firm—they are the Firms-demand
same. curve
 It follows that the demand curve for the (247682T,
monopoly firm is the market demand curve, 237104W)
which is downward sloping.
 A downward-sloping demand curve posits an
inverse relationship between price and
quantity demanded:
 More is sold at lower prices than at higher
prices, ceteris paribus.
 The monopolist can raise its price and still sell
its product (though not as much).
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 8
 Vs competitive
firms
FOR A MONOPOLIST, P > MR 247636T,
237960W

To sell an additional unit of its good,

a monopolist needs to lower price.
This price reduction both gains
revenue and loses revenue for the
monopolist.
In the exhibit, the revenue gained and
revenue lost are shaded and labeled.
Marginal revenue is equal to the
larger shaded area minus the smaller
shaded area.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 9
 DEMAND AND MARGINAL REVENUE
CURVES
Vs competitive
firms demand and
 The demand curve plots MR curves:
238347W, 247638T
price and quantity.
 The marginal revenue
curve plots marginal
revenue and quantity.
 For a monopolist, P >
MR, so the marginal
revenue curve must lie
below the demand
curve.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 10
 MONOPOLIST’S PROFIT-MAXIMIZING
PRICE AND QUANTITY OF OUTPUT
Vs competitive
firms profit
The monopolist produces the maximization
quantity of output (Q1) at 239114W, 247644T
which MR= MC, and charges
the highest price per unit at
which this quantity of
output can be sold (P1).
 Notice that at the profit-
maximizing quantity of
output, price is greater than
marginal cost, P >MC.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 11
 MONOPOLY PROFITS AND LOSSES
● Try to draw ATC, MC, MR, Demand (=
price) for Monopoly in a figure

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 9 • 12
 MONOPOLY PROFITS AND LOSSES

Three types of profit: The concepts of profit:

1. Profit > 0 Eg:
2. Profit < 0 (losses) Profit > 0 = MR > MC
Profit < 0 =
3. Profit = 0
Profit = 0=
239288W, 247657T

Then try to draw a figure…

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 13
 CONT..
239575W, 247666T

Draw Zero profit

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 9 • 14
 MONOPOLY PROFITS AND LOSSES

 A monopoly seller is not

guaranteed any profits.
Here, price is at above
average total cost at Q1,
the quantity of output at
which MR = MC.
 Therefore, TR (the area
0P1BQ1) is greater than
TC (the area 0CAQ1),
and profits equal the
area CP1BA.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 15
 MONOPOLY PROFITS AND LOSSES

Here, price is below

average total cost at
Q1.
Therefore, TR (the
area 0P1AQ1) is less
than TC (the area
0CBQ1) and losses
equal the area
P1CBA.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 16
 MONOPOLY IN THE LONG-RUN

● In the discussion of a ● The distinction between the

perfectly competitive market short‐run and the long‐run is
not as important in the case
structure, a distinction was of a monopolistic market
made between short‐run and structure. The existence of
long‐run market behavior. In high barriers to entry
the long‐run, all input factors prevents firms from entering
are assumed to be variable, the market even in the
long‐run. Therefore, it is
making it possible for firms possible for the monopolist to
to enter and exit the market. avoid competition and
The consequence of this entry continue
and exit of firms was that making positive economic
each firm's economic profits profits in the long‐run.
were reduced to zero in the
long‐run.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 9 • 17
 PERFECT COMPETITION AND
MONOPOLY I-REVIEW
 The perfectly competitive firm is a price taker; it has no
control over the price of the product it sells. The monopoly
firm is a price searcher; it has some control over the price of
the product it sells.
 Essentially, what determines whether a firm is a price taker
or a price searcher is the demand curve that it faces. The
perfectly competitive firm faces a horizontal demand curve.
The monopoly firm faces a downward-sloping demand curve.
 If a firm faces a horizontal (or flat) demand curve, then it is a
price taker. A horizontal (or flat) demand curve implies that
the firm can sell its good at only one price: the price
determined by the market.
 If a firm faces a downward sloping demand curve, then it is a
price searcher because of what each demand curve implies
about the firm’s ability to control price.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 18
 PERFECT COMPETITION AND
MONOPOLY II-REVIEW
 For the perfectly competitive firm, P = MR; for
the monopolist, P > MR.
 The perfectly competitive firm’s demand curve
is its marginal revenue curve; the monopolist’s
demand curve lies above its marginal revenue
curve.
 The perfectly competitive firm charges a price
equal to marginal cost; the monopolist charges
a price greater than marginal cost.

Perfect competition: P = MR and P = MC

Monopoly: P > MR and P > MC

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 19
 1. Why does the monopolist’s demand
curve lie above its marginal revenue
curve? Try to understand this.
SELFTEST
The single-price monopolist has to lower price to
sell an additional unit of its good (as a
downward-sloping demand curve necessitates).
As long as it has to lower price to sell an
additional unit, its marginal revenue will be
below its price. A demand curve plots price (P)
and quantity (Q), and a marginal revenue curve
plots marginal revenue (MR) and quantity (Q).
Because P > MR for a monopolist, its demand
curve will lie above its marginal revenue curve.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 20
 2. Is a monopolist guaranteed to
earn profits?
SELFTEST
No.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 21
 3. Is a monopolist resource allocative
efficient? Why or why not?
No. A firm is resource allocative efficient when it
SELFTEST
charges a price equal to its marginal cost (P = MC).
The monopolist does not do this; it
charges…..…………………………

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 22
 4. A monopolist is a price
searcher. What is it searching
for? Why do you think it is called
SELFTEST
a price searcher?
A monopolist is searching for…...

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 24 • 23