Introduction
Monopoly
Monopoly is a market structure in which a single firm makes up the entire market. Monopolies exist because of barriers to entry into a market that prevent competition.
Introduction
Legal barriers, such as patents, prevent others from entering the market. Sociological barriers entry is prevented by custom or tradition.
Introduction
Natural barriers the firm has a unique ability to produce what other firms cant duplicate. Technological barriers the size of the market can support only one firm.
The Key Difference Between a Monopolist and a Perfect Competitor
For a competitive firm, marginal revenue equals price. For a monopolist it does not. The monopolist takes into account the fact that its production decision can affect price.
The Key Difference Between a Monopolist and a Perfect Competitor
A competitive firm is too small to affect the price. It does not take into account the effect of its output decision on the price it receives.
The Key Difference Between a Monopolist and a Perfect Competitor
A competitive firm's marginal revenue is the market price. A monopolistic firms marginal revenue is not its price it takes into account that its output decision can affect price.
A Model of Monopoly
How much should the monopolistic firm choose to produce if it wants to maximize profit?
The Monopolists Price and Output Numerically
The first thing to remember is that marginal revenue is the change in total revenue that occurs as a firm changes its output.
The Monopolists Price and Output Numerically
When a monopolist increases output, it lowers the price on all previous units. As a result, a monopolists marginal revenue is always below its price.
TR=P x Q
MR = Change in Total Revenue/ change in output
Another way to say it is: how much does your Total Revenue changes as you increase output output
The Monopolists Price and Output Numerically
In order to maximize profit, a monopolist produces the output level at which marginal cost equals marginal revenue. Producing at an output level where MR > MC or where MR < MC will yield lower profits.
Profit Maximization for a Monopolist
Output Price TR MR TC MC ATC Profit
0 1 2 3 4 5 6 7 8 9
36 33 30 27 24 21 18 15 12 9
0 33 60 81 96 105 108 105 96 81
33 27 21 15 9 3 3 9 15
47 48 50 54 62 78 102 142 196 278
1 2 4 8 16 24 40 56 80
48.00 25.00 18.00 15.50 15.60 17.00 20.29 24.75 30.89
47 15 10 27 34 27 6 37 102 197
The Monopolists Price and Output Graphically
The marginal revenue curve is a graphical measure of the change in revenue that occurs in response to a change in price. It tells us the additional revenue the firm will get by expanding output.
MR = MC Determines the ProfitMaximizing Output**
If MR > MC, the monopolist gains profit by increasing output. If MR < MC, the monopolist gains profit by decreasing output. If MC = MR, the monopolist is maximizing profit.
The Price a Monopolist Will Charge
The MR = MC condition determines the quantity a monopolist produces. The monopolist will charge the maximum price consumers are willing to pay for that quantity. That price is found on the demand curve.
The Price a Monopolist Will Charge
To determine the profit-maximizing price (where MC = MR), first find the profit maximizing output.
Determining the Monopolists Price and Output
Price $36 30 24 18 12 6 0 6 12 Monopolist price MC
Comparing Monopoly and Perfect Competition
Equilibrium output for both the monopolist and the competitor is determined by the MC = MR condition.
D 1 2 3 4 5 6 7 8 9 10 MR
Comparing Monopoly and Perfect Competition
Because the monopolists marginal revenue is below its price, price and quantity will not be the same. The monopolists equilibrium output is less than, and its price is higher than, for a firm in a competitive market.
Comparing Monopoly and Perfect Competition
Price $36 30 24 18 12 6 0 6 12 Monopolist price Competitive price MC
D 1 2 3 4 5 6 7 8 9 10 MR
Profits and Monopoly
Draw the firm's marginal revenue curve. Determine the output the monopolist will produce by the intersection of the MC and MR curves.
Profits and Monopoly
Determine the price the monopolist will charge for that output. Determine the average cost at that level of output.
Profits and Monopoly
Determine the monopolist's profit (loss) by subtracting average total cost from average revenue (P) at that level of output and multiply by the chosen output.
Profits and Monopoly
The monopolist will make a profit if price exceeds average total cost. The monopolist will make a normal return if price equal average total cost. The monopolist will incur a loss if price is less than average total cost.
A Monopolist Making a Profit
A monopolist can make a profit.
A Monopolist Making a Profit
Price MC
PM Profit CM
A B
ATC
MR 0 QM
D Quantity
A Monopolist Breaking Even
A monopolist can break even.
A Monopolist Breaking Even
Price MC ATC PM
MR 0 QM
D Quantity
A Monopolist Making a Loss
A monopolist can make a loss.
A Monopolist Making a Loss
Price CM PM B Loss A MC ATC
MR 0 QM
D Quantity