Chapter 11 Monopoly 1 Monopoly Assumptions Restricted entry

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Chapter 11: Monopoly 1

Chapter 11: Monopoly 1

Monopoly Assumptions: • Restricted entry • One firm produces a distinct product Implications: •

Monopoly Assumptions: • Restricted entry • One firm produces a distinct product Implications: • A monopolist firm is a ‘price setter, ’ that is, they can affect the market price and set it to maximize their profits (demand curve slopes downward) – Profit maximizing output occurs where MC=MR (like perfect competition), but price is above MC • Economic profits are positive in the long run • A monopolist sets price and quantity simultaneously and therefore does not have a true supply curve • The monopolist’s profit-maximizing output will not be socially optimal 2

Sources of Monopoly • Various sources of barriers to entry, such as: – Exclusive

Sources of Monopoly • Various sources of barriers to entry, such as: – Exclusive control over natural resources – Economies of scale • Natural monopoly has a constantly downward sloping LRATC curve – – Patents/trademarks Network economies Government licenses or franchises Product differentiation 3

Monopoly: Numeric Example Q P TR MR TC MC ATC Profit 0 100 0

Monopoly: Numeric Example Q P TR MR TC MC ATC Profit 0 100 0 0 200 200 -200 10 90 90 420 22 42 480 18 80 1440 67. 5 660 30 36. 67 780 24 70 1680 40 900 40 37. 5 28 60 1680 0 1108 52 39. 57 572 30 50 1500 -90 1240 66 41. 33 260 780 4

Monopoly Price/Marginal Revenue Inefficiency or deadweight loss Marginal cost P* Average total cost profits

Monopoly Price/Marginal Revenue Inefficiency or deadweight loss Marginal cost P* Average total cost profits demand Q* Marginal revenue widgets 5

Algebra of Marginal Revenue and Elasticity • Marginal Revenue • Recall: Price Elasticity of

Algebra of Marginal Revenue and Elasticity • Marginal Revenue • Recall: Price Elasticity of Demand • Therefore, 6

Monopolist Profit-Maximizing Markup 7

Monopolist Profit-Maximizing Markup 7

Algebra of Monopoly Optimums • A monopolist faces the following demand marginal cost curves

Algebra of Monopoly Optimums • A monopolist faces the following demand marginal cost curves • What is the profit-maximizing price it will charge? What is the total profit? What is the size of the inefficiency? 8

Two-Plant Monopoly Market 1 Market 2 Total MC P 2 P 1 MC* MR

Two-Plant Monopoly Market 1 Market 2 Total MC P 2 P 1 MC* MR 1 + MR 2 Q 1 Q 2 Q 1 + Q 2 9

Total Revenue: Monopoly v. Perfect Competitor Total Revenue TR = P*Q Slope = P*

Total Revenue: Monopoly v. Perfect Competitor Total Revenue TR = P*Q Slope = P* Perfect Competitor Q Single-Price Monopoly Q 10

Monopoly v. Perfect Competitor Monopoly • Price setter • MR is declining and below

Monopoly v. Perfect Competitor Monopoly • Price setter • MR is declining and below demand curve • Equilibrium price is set above MC • Economically inefficient Perfect Competitor • Price taker • MR is constant • Marginal cost pricer • Economically efficient 11