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Pure Monopoly: Mcgraw-Hill/Irwin
Pure Monopoly: Mcgraw-Hill/Irwin
Pure Monopoly
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Four Market Models
Characteristics of the Four Basic Market Models
Pure Monopolistic
Characteristic Competition Competition Oligopoly Monopoly
Number of firms A very large Many Few One
number
Type of product Standardized Differentiated Standardized or Unique; no
differentiated close subs.
Control over None Some, but within rather Limited by mutual Considerable
price narrow limits inter-dependence;
considerable with
collusion
LO1 12-3
Barriers to Entry
LO1 12-4
Monopoly Demand
LO1 12-5
Monopoly Demand
LO2 12-6
Output and Price Determination
Steps for Graphically Determining the Profit-Maximizing Output, Profit-
Maximizing Price, and Economic Profits (if Any) in Pure Monopoly
Step 1 Determine the profit-maximizing output by finding where MR=MC.
Determine the profit-maximizing price by extending a vertical line
Step 2 upward from the output determined in step 1 to the pure monopolist’s
demand curve.
Method 2. Find total cost by multiplying the average total cost of the
profit-maximizing output by that output. Find total revenue by
multiplying the profit-maximizing output by the profit-maximizing price.
Then subtract total cost from total revenue to determine the economic
profit (if any).
LO2 12-7
Output and Price Determination
$200
Price, Costs, and Revenue
175
Pm=$122 MC
150
125
Economic
Profit ATC
100
75 D
A=$94
MR=MC
50
25
MR
0
1 2 3 4 5 6 7 8 9 10
Quantity
LO2 12-8
Misconceptions of Monopoly Pricing
LO2 12-9
Misconceptions of Monopoly Pricing
MC
ATC
A Loss
Pm
AVC
V
D
MR=MC
MR
0 Qm
LO2 12-10
Economic Effects of Monopoly
Pure competition is efficient
Monopoly is inefficient
S=MC MC
Pm b
P=MC= d
Pc Pc c
Minimum
ATC a
D D
MR
Qc Qm Qc
(a) (b)
Purely Competitive Market Pure Monopoly
LO3 12-11
Economic Effects of Monopoly
• Income transfer
• Cost complications
• Economies of scale
• X-Inefficiency
• Rent seeking expenditures
• Technological advance
LO3 12-12
X-Inefficiency
ATCx X
ATC1
X'
ATCx' Average
ATC2 Total Cost
Q1 Q2
LO3 12-13
Price Discrimination
• Price discrimination
Price Discrimination
• Charging different buyers different
prices
• Price differences are not based on
cost differences
• Examples: business travel, electric
utilities, movie theaters, golf
courses, railroad companies,
coupons, international trade
LO4 12-14
Price Discrimination
LO4 12-15
Regulated Monopoly
• Natural monopolies
• Socially optimal price
• Set price = marginal cost
• Fair return price
• Set price = ATC
LO5 12-16
Regulated Monopoly
Monopoly
Price
Pm Fair-Return
Price
Socially
a f Optimal
Pf Price
ATC
Pr r MC
MR D
b
Qm Qf Qr
LO5 12-17