Monopoly

Only available on StudyMode
  • Download(s) : 122
  • Published : December 29, 2012
Open Document
Text Preview
10/23/2012

CHAPTER

15
Monopoly

In this chapter, look for the answers to these questions:
 Why do monopolies arise?  Why is MR < P for a monopolist?  How do monopolies choose their P and Q?  How do monopolies affect society’s well-being?  What can the government do about monopolies?  What is price discrimination?

Economics
PRINCIPLES OF

N. Gregory Mankiw

Premium PowerPoint Slides by Ron Cronovich
© 2009 South-Western, a part of Cengage Learning, all rights reserved

1

Introduction
 A monopoly is a firm that is the sole seller of a
product without close substitutes.

Why Monopolies Arise
The main cause of monopolies is barriers to entry – other firms cannot enter the market. Three sources of barriers to entry: 1. A single firm owns a key resource. E.g., DeBeers owns most of the world’s diamond mines 2. The govt gives a single firm the exclusive right to produce the good. E.g., patents, copyright laws 2

 In this chapter, we study monopoly and contrast
it with perfect competition.

 The key difference:
A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power.

MONOPOLY

MONOPOLY

3

Why Monopolies Arise
3. Natural monopoly: a single firm can produce the entire market Q at lower cost than could several firms. Example: 1000 homes need electricity ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. MONOPOLY

Monopoly vs. Competition: Demand Curves
In a competitive market, the market demand curve slopes downward. But the demand curve for any individual firm’s product is horizontal at the market price. The firm can increase Q without lowering P, so MR = P for the competitive firm. 4

Cost

Electricity
ATC slopes downward due to huge FC and small MC ATC 500 1000 Q

P

A competitive firm’s demand curve

$80 $50

D

Q
5

MONOPOLY

1

10/23/2012

Monopoly vs. Competition: Demand Curves
A monopolist is the only seller, so it faces the market demand curve. To sell a larger Q, the firm must reduce P. Thus, MR ≠ P. P

ACTIVE LEARNING

A monopoly’s revenue
Common Grounds is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. Q 0 1 2 3 4 5 6 P $4.50 4.00 3.50 3.00 2.50 2.00 1.50

7

1

TR

AR n.a.

MR

A monopolist’s demand curve

D Q
MONOPOLY
6

What is the relation between P and AR? Between P and MR?

ACTIVE LEARNING

Answers
Here, P = AR, same as for a competitive firm. Here, MR < P, whereas MR = P for a competitive firm. Q 0 1 2 3 4 5 6

1

Common Grounds’ D and MR Curves
P TR $0 4 7 9 10 10 9 AR n.a. $4.00 3.50 3.00 2.50 2.00 1.50 8

MR $4 3 2 1 0 –1

Q

P

MR $4 3 2 1 0 –1

$4.50 4.00 3.50 3.00 2.50 2.00 1.50

0 $4.50 1 2 3 4 5 6 4.00 3.50 3.00 2.50 2.00 1.50

P, MR $5 4 3 2 1 0 -1 -2 -3 0 1 2 3

Demand curve (P)

MR

4

5

6

7

Q
9

MONOPOLY

Understanding the Monopolist’s MR
 Increasing Q has two effects on revenue:  Output effect: higher output raises revenue  Price effect: lower price reduces revenue  To sell a larger Q, the monopolist must reduce the price on all the units it sells.

Profit-Maximization
 Like a competitive firm, a monopolist maximizes
profit by producing the quantity where MR = MC.

 Once the monopolist identifies this quantity,
it sets the highest price consumers are willing to pay for that quantity.

 Hence, MR < P  MR could even be negative if the price effect exceeds the output effect (e.g., when Common
Grounds increases Q from 5 to 6).
10

 It finds this price from the D curve.

MONOPOLY

MONOPOLY

11

2

10/23/2012

Profit-Maximization
1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Q Costs and Revenue MC

The Monopolist’s Profit
Costs and Revenue MC ATC

P

D MR Quantity

As...
tracking img