Economics and Monopoly Introduction

Topics: Economics, Monopoly, Perfect competition Pages: 6 (589 words) Published: February 9, 2014
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"

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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.

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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 economies of scale, legal, technological or another type.
Nonprice competition: Since it has no competitors a monopolist cannot compete on price. Therefore, to attract new consumers the firm must engage in non-price competition such as advertising and public relations campaigns to promote its product's attributes.

Examples of Monopolies?

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3

Unit 2.3.3 Pure Monopoly

Monopoly
Demand as seen by a Monopolist

Three assumptions:
1) Entry is totally blocked
2) The monopolist is unregulated by any government so can charge whatever price it wants.
3) The firm is a single price seller. It sells all units of output at the same price.

• A monopolist faces a downward sloping Demand curve. The firm D curve is the market D curve!
• A monopolist can sell additional output only by lowering its price (due to the law of demand).
• A monopolist must lower the price of all of its output, not just the marginal units, since it is a single-price seller.
• As a result, as output increases, the firm's marginal revenue falls faster than the price.

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4

Unit 2.3.3 Pure Monopoly

Monopoly
Demand as seen by a Monopolist

Demand and Marginal Revenue
Q
0
1
P1 2
3
4
5
P2 6
7
8
9
P3 10

P
172
162
152
142
132
122
112
102
92
82
72

TR=PxQ)

0
162
304
426
528
610
672
714
736
738
720

Demand and MR for a Monopolist

P

MR=ΔTR/ΔQ

P1
P2
P3
D=AR=P

Q1

Q2

Q3

Q

MR

Based on the above graph, over
which range of output would a
monopolist NEVER produce? Why?
What information is needed to determine
the profit maximizing level of output for
this monopolist?

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5

Unit 2.3.3 Pure Monopoly

Monopoly
Demand as seen by a Monopolist
Elasticity and the monopoly Demand curve:
• Identify the elastic range of the demand curve.
• Identify the inelastic range of the demand
curve.

P

Demand and MR
PED>1

P1
PED=1

Question: Why...
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