Economics and Monopoly Introduction
Unit 2.3.3 Pure Monopoly
Unit 2.3.3 Monopoly
Unit Overview
2.3.3 - Monopoly
• Assumptions of the model
• Sources of monopoly power/barriers to entry
• Natural monopoly
• Demand curve facing the monopolist
• Profit-maximizing level of output
• Advantages and disadvantages of monopoly in comparison with perfect competition
• Efficiency in monopoly
• Price discrimination
>>Definition
>>Reasons for price discrimination
>>Necessary conditions for the practice of price discrimination
>>Possible advantages to either the producer or the consumer
Blog posts: "Monopoly"
www.welkerswikinomics.com
Blog posts: "Price Discrimination"
1
Unit 2.3.3 Pure Monopoly
Monopoly
Introduction to Monopoly
Discussion Questions:
True or false: A monopolist will always earn economic profits.
False: A monopolist's profits depend on the level of demand for its product. If demand falls, the monopolist's profits will fall and could disappear. True or false: A monopolists will always charge the highest possible price for its output.
False: Just like a purely competitive firm, a monopolist will maximize its profits when it charges the price where its marginal revenue equals its marginal cost of production.
www.welkerswikinomics.com
2
Unit 2.3.3 Pure Monopoly
Monopoly
Characteristics of Monopolistic markets
Characteristics:
Single seller: One firm produces all the output of a particular product
No close substitutes: Product is unique and if consumers want to buy it they must buy from the monopolist.
Price maker: Since the monopolist is the sole supplier of the product, it can change the price by changing output. The firm faces a downward sloping demand curve, so increasing output lowers the price, decreasing output increases the price. The firm will set a price that maximizes its profits.
Blocked entry: Entry to the market is totally blocked, meaning the firm has no immediate competitors. Barriers to entry may be
Unit 2.3.3 Monopoly
Unit Overview
2.3.3 - Monopoly
• Assumptions of the model
• Sources of monopoly power/barriers to entry
• Natural monopoly
• Demand curve facing the monopolist
• Profit-maximizing level of output
• Advantages and disadvantages of monopoly in comparison with perfect competition
• Efficiency in monopoly
• Price discrimination
>>Definition
>>Reasons for price discrimination
>>Necessary conditions for the practice of price discrimination
>>Possible advantages to either the producer or the consumer
Blog posts: "Monopoly"
www.welkerswikinomics.com
Blog posts: "Price Discrimination"
1
Unit 2.3.3 Pure Monopoly
Monopoly
Introduction to Monopoly
Discussion Questions:
True or false: A monopolist will always earn economic profits.
False: A monopolist's profits depend on the level of demand for its product. If demand falls, the monopolist's profits will fall and could disappear. True or false: A monopolists will always charge the highest possible price for its output.
False: Just like a purely competitive firm, a monopolist will maximize its profits when it charges the price where its marginal revenue equals its marginal cost of production.
www.welkerswikinomics.com
2
Unit 2.3.3 Pure Monopoly
Monopoly
Characteristics of Monopolistic markets
Characteristics:
Single seller: One firm produces all the output of a particular product
No close substitutes: Product is unique and if consumers want to buy it they must buy from the monopolist.
Price maker: Since the monopolist is the sole supplier of the product, it can change the price by changing output. The firm faces a downward sloping demand curve, so increasing output lowers the price, decreasing output increases the price. The firm will set a price that maximizes its profits.
Blocked entry: Entry to the market is totally blocked, meaning the firm has no immediate competitors. Barriers to entry may be