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MonopolyThis firm is now the ultimate market power in the galaxy
Monopoly = MarketO The lack of direct competition
means that a monopoly behaves differenty than does a firm in a competitive market
O In monopoly situations, the demand curve facing the firm is the same as the market demand curve.
Price vs Marginal Revenue
O FOR FIRMS IN COMPETITIVE MARKETS:O Price = Marginal Revenue
O When the price is set by the market, the additional revenue from one more unit of output is the same as the market price
O FOR MONOPOLY FIRM:O Price > MR
O When a monopoly firm selects its output level, it is subject to the Law of Demand
O In order to sell additional amounts of output, the price must decrease
O The MR curve will be below the price curve at every point except the first
Profit MaximizationO In addition to making a decision on
output, monopoly firms must make a pricing decision as well.
O General Profit Maximization RuleO When MR = MC profit is maximized
Monopoly Price & Profits
O The profit maximizing rate of output is found at the intersection of the marginal revenue and marginal cost curves
O The highest price consumers are willing to pay for a specific quantity of output is established by the demand curve
O Only ONE price maximizes profit
Barriers to EntryO Threat of Entry
O Monopolies attain higher prices and profits by limiting output
O This power depends on oother firms not entering the market
O Types of Barrier to Entry:O Patent ProtectionO Legal HarassmentO Exclusive LicensingO Bundled ProductsO Government Franchises
Comparative OutcomesO Monopoly vs Competition
O See chart on pg 156O Monopoly vs DuopolyO Monopoly vs OligopolyO Monopoly vs Monopolistic
Competition
Defenses of MonopolyO Entrepreneurial IncentivesO Economies of ScaleO Natural MonopliesO Contestable MarketsO Structure vs Behavior
Practice Problems for Homework
O Page 166O Problems # 2, 4, 6, 7, 8
