Monopoly chart

7/30/2019 Monopoly chart

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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Monopoly

A monopoly is the sole seller of its

product.

its product does not have closesubstitutes.

While a competitive firm is a price

taker, a monopoly is a price maker.


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The fundamental cause ofmonopoly is barriers to entry

Why barriers to entry?Ownership of key resource.

Government franchise: exclusive right to produce

the good.Costs of production: a single producer is more

efficient than many producersnatural monopoly..


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Econom ies o f Scale as a Cause of Monopo ly:

HIGH fixed costs ATC turn up only beyondthe extent of the market

Natural Monopoly

Averagetotalcost

Quantity of Output

Cost

0


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Quantity ofOutput

Demand

(a) A Competitive FirmsDemand CurveThe competitive firmtakes the market price

(b) A MonopolistsDemand Curve is thedownward slopingindustry demand curve

0

Price

0 Quantity ofOutput

Price

Demand

Demand Curves for Compet i tive and

Monopoly Firms...


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Monopoly Revenue

Total Revenue

P x Q = TR

just like competitive firm.

Average Revenue

TR/Q = AR = P

just like competitive firm.

BUTMarginal Revenue

DTR/DQ = MR < P


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A Monopolys Total, Average, and

Marginal Revenue

Quantity

(Q)

Price

(P)

Total Revenue

(TR=PxQ)

Average

Revenue

(AR=TR/Q)

Marginal Revenue

(MR= )0 $11.00 $0.00

1 $10.00 $10.00 $10.00 $10.00

2 $9.00 $18.00 $9.00 $8.00

3 $8.00 $24.00 $8.00 $6.00

4 $7.00 $28.00 $7.00 $4.00

5 $6.00 $30.00 $6.00 $2.006 $5.00 $30.00 $5.00 $0.00

7 $4.00 $28.00 $4.00 -$2.00

8 $3.00 $24.00 $3.00 -$4.00

QTRD

D

/


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Demand and Marginal Revenue Curves

for a Monopo ly...

Quantity of Water

Price

$11

10

9

8

7

6

5

4

3

21

0

-1

-2

-3-4

1 2 3 4 5 6 7 8

Marginalrevenue

Demand

(average revenue)



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A Monopolys Marginal Revenue

DTR/DQ = MR < P

When a monopoly increases the

amount it sells, it has two effects ontotal revenue (TR = P x Q).

The output effectmore output is

sold, so Q is higher + P x Q.The price effectpr ice fal ls, so P is

lower - Q x P.


9/36Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Profit Maximization of a Monopoly

Produce quantity where

MR = MC

Sell at the price where consumers buy

that profit maximizing quantity.

P = AR > MR = MC

H t I it d d i d it i ht 2001 b H t I


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Prof i t -Maxim ization for a Monopoly ...

Monopolyprice

QuantityQMAX0

Costs andRevenue

Demand

Average total cost

Marginal revenue

Marginalcost

A

1. The intersection ofthe marginal-revenuecurve and the marginal-cost curve determinesthe profit-maximizingquantity...B

2. ...and then the demandcurve shows the priceconsistent with thisquantity.




Comparing Monopoly andCompetition

For a competitive firm, price equals

marginal cost.

P = MR = MCFor a monopoly firm, price exceeds

marginal cost.

P > MR = MCP > MC

Ineff ic iency

Harco rt Inc items and deri ed items cop right 2001 b Harco rt Inc


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The Monopolists Profit...

Quantity0

Costs andRevenue

Demand

Marginal cost

Marginal revenue

QMAX

BMonopolyprice

E

Average

total cost D

Average total cost

C


Harcourt Inc items and derived items copyright 2001 by Harcourt Inc


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The Ineff ic iency o f Monopo ly...

Quantity0

DemandMarginalrevenue

Marginal cost

Monopoly

price

Deadweightloss

Efficientquantity

Monopolyquantity

Price




The Inefficiency of MonopolyThe monopolist produces less

than socially efficient output.

The monopolist earns moreby

doing less.



Public Policy Toward Monopolies

Antitrust Laws: Make monopolized

industries more competitive.

Regulate monopoly prices.

Run monopolies as public enterprises.

Do nothing.



Price DiscriminationPrice discrimination -- selling the

same good at different prices to

different customers.In order to price discriminate, the

firm must have some market power.


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Welfare With Price

Discr iminat ion.. .

Price

0 Quantity

Demand

Marginal cost

Quantity sold

(b) Monopolist with Perfect Price Discrimination

Profit



Examples of Price Discrimination

Mov ie t ickets

A ir l ine prices

Discount coupons

Financ ial aid

Quant i ty d iscounts



The Prevalence of Monopoly

Most firms have somecontrol overtheir prices because ofdifferentiated

products.

Firms with substantial monopolypower are rare: few goods are truly

unique.

Monopolists face competition from

other industries.



Summary

A monopoly is a firm that is the sole

seller in its market.

It faces a downward-sloping demand

curve for its product.

A monopolys marginal revenue isalways below the price of its good.



Summary

Like a competitive firm, a monopoly

maximizes profit by producing the

quantity at which marginal cost andmarginal revenue are equal.

Unlike a competitive firm, its price

exceeds its marginal revenue, so itsprice exceeds marginal cost

INEFFICIENCY



Summary

A monopolists profit-maximizing level

of output is below the level that

maximizes the sum of consumer andproducer surplus

INEFFICIENCY


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GraphicalReview



Econom ies o f Scale as a Cause of

Monopoly. . .

Averagetotalcost

Quantity of Output

Cost

0



Quantity ofOutput

Demand

(a) A Competitive FirmsDemand Curve

(b) A MonopolistsDemand Curve

0

Price

0 Quantity ofOutput

Price

Demand

Demand Curves for Compet i tive and

Monopoly Firms...



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Demand and Marginal Revenue Curves

for a Monopo ly...

Quantity of Water

Price

$11

10

9

8

76

5

4

3

21

0

-1

-2

-3-4

1 2 3 4 5 6 7 8

Marginalrevenue

Demand

(average revenue)



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Prof i t -Maxim ization for a Monopoly ...

Monopolyprice

QuantityQMAX0

Costs andRevenue

Demand

Average total cost

Marginal revenue

Marginalcost

A

1. The intersection ofthe marginal-revenuecurve and the marginal-cost curve determinesthe profit-maximizing

quantity...B

2. ...and then the demandcurve shows the priceconsistent with thisquantity.



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The Monopolists Profit...

Quantity0

Costs andRevenue

Demand

Marginal cost

Marginal revenue

QMAX

BMonopolyprice

E

Average

total cost D

Average total cost

C


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The Market for Drugs ...

Costs andRevenue

Priceduring

patent life

Price after

patentexpires

Monopolyquantity

Competitivequantity

0 Quantity

Demand

Marginal

costMarginalrevenue


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The Eff ic ient Level o f Outpu t...Price

0 Quantity

Marginal cost

Demand

(value to buyers)

Efficientquantity

Cost tomonopolist

Valuetobuyers

Valueto

buyers

Cost tomonopolist

Value to buyers is greater

than cost to seller.

Value to buyers is less

than cost to seller.



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The Ineff ic iency o f Monopo ly...

Quantity0

DemandMarginalrevenue

Marginal cost

Monopoly

price

Deadweightloss

EfficientquantityMonopolyquantity

Price


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Marg inal-Cos t Pricing fo r a Natu ral

Monopoly. . .

Regulatedprice

Quantity0

Loss

Price

Demand

Marginal cost

Average total costAveragetotal cost


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Welfare Withou t Price

Discriminat ion.. .

Deadweightloss

Consumersurplus

Price

0 Quantity

Profit

Demand

Marginal cost

Marginalrevenue

Quantity sold

Monopolyprice

(a) Monopolist with Single Price


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Welfare With Price

Discr iminat ion.. .

Price

0 Quantity

Demand

Marginal cost

Quantity sold

(b) Monopolist with Perfect Price Discrimination

Profit

Documents

Monopoly chart