Whats the difference between monopoly and competition Monopoly
What’s the difference between monopoly and competition? • Monopoly: one firm selling a product • Competition: many firms selling same product • Other models (we will consider later) – Monopolistic Competition: many firms differentiated products – Oligolopy: few firms • Model versus reality
Examples of Monopoly • • U. S. Postal Service Local telephone service Water, electricity, cable TV Standard Oil OPEC? Computer Chips? Internet Browsers? Campus Bookstore?
Elements of a Model of a Monopoly • Maximize profits • Cost curves – marginal cost (MC), average total cost (ATC) • Faces downward sloping demand curve
Market Power
An Example of a Monopoly
Why is marginal revenue less than demand? • Lower price tends to reduce revenues (see diagram) • demand is average revenue: that is P = (Px. Q/Q) =AR – demand curve slopes down implies: – MR < AR = demand
Condition for Profit Maximization • • Marginal Revenue equals Marginal Cost MR = MC Intuitive Rationale Graphical illustration
The Graph of a Monopoly
Now let’s sketch a graph of a monopoly by hand
Monopolies sometimes run losses
Do monopolies cause deadweight loss? Yes, because the monopoly produces too little.
Deadweight Loss from Monopoly
Key Conclusions • Monopoly output less than competitive output • P> MC • Deadweight loss is created by a monopoly • Market Failure
- Slides: 18