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2011
Monopoly
15
Copyright2004 South-Western
Copyright 2004 South-Western
Monopoly Resources
Although exclusive ownership of a key
resource is a potential source of monopoly, in
practice monopolies rarely arise for this reason.
06.09.2011
Government-Created Monopolies
Government-Created Monopolies
Natural Monopolies
Natural Monopolies
Cost
Competitive Firm
Average
total
cost
0
Quantity of Output
Copyright 2004 South-Western
06.09.2011
A Monopolys Revenue
Total Revenue
Demand
Demand
Quantity of Output
P Q = TR
Average Revenue
TR/Q = AR = P
Marginal Revenue
TR/Q = MR
Quantity of Output
A Monopolys Revenue
A Monopolys Marginal Revenue
A monopolists marginal revenue is always less
than the price of its good.
The demand curve is downward sloping.
When a monopoly drops the price to sell one more unit,
the revenue received from previously sold units also
decreases.
Copyright2004 South-Western
A Monopolys Revenue
Price
$11
10
9
8
7
6
5
4
3
2
1
0
1
2
3
4
Demand
(average
revenue)
Marginal
revenue
1
Quantity of Water
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Profit Maximization
A monopoly maximizes profit by producing the
quantity at which marginal revenue equals
marginal cost.
It then uses the demand curve to find the price
that will induce consumers to buy that quantity.
Costs and
Revenue
Monopoly
price
Demand
Marginal
cost
Marginal revenue
0
QMAX
Quantity
Copyright 2004 South-Western
Profit Maximization
A Monopolys Profit
Profit = TR - TC
Profit = (TR/Q - TC/Q) Q
Profit = (P - ATC) Q
A Monopolists Profit
Costs and
Revenue
Marginal cost
Monopoly E
price
Monopoly
M
l
profit
Average
total D
cost
C
Demand
Marginal revenue
0
QMAX
Quantity
Copyright 2004 South-Western
06.09.2011
Costs and
Revenue
Price
d i
during
patent life
Price after
patent
expires
Marginal
cost
Demand
Marginal
revenue
0
Monopoly
quantity
Quantity
Competitive
quantity
Value
to
buyers
Cost
to
monopolist
Value
to
buyers
Cost
to
monopolist
Demand
(value to buyers)
Quantity
0
Value to buyers
is greater than
cost to seller.
Value to buyers
is less than
cost to seller.
Efficient
quantity
Copyright 2004 South-Western
Marginal cost
Monopoly
price
Marginal
revenue
Monopoly Efficient
quantity quantity
Demand
Quantity
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Regulation
Government may regulate the prices that the
monopoly charges.
Price
Loss
Demand
0
Quantity
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Regulation
Public Ownership
PRICE DISCRIMINATION
Doing Nothing
Government can do nothing at all if the market
failure is deemed small compared to the
imperfections of public policies.
PRICE DISCRIMINATION
Price discrimination is not possible when a
good is sold in a competitive market since there
are many firms all selling at the market price.
In order to p
price discriminate, the firm must
have some market power.
Perfect Price Discrimination
PRICE DISCRIMINATION
Two important effects of price discrimination:
It can increase the monopolists profits.
It can reduce deadweight loss.
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Price
Price
Consumer
surplus
Deadweight
D
d i ht
loss
Monopoly
price
Profit
Profit
Marginal cost
Marginal
revenue
Quantity sold
Marginal cost
Demand
Demand
Quantity
Quantity sold
PRICE DISCRIMINATION
CONCLUSION: THE
PREVALENCE OF MONOPOLY
How prevalent are the problems of monopolies?
Quantity
Movie tickets
Airline prices
Discount coupons
Financial aid
Quantity discounts
Summary
Summary
06.09.2011
Summary
Summary
Summary
Monopolists can raise their profits by charging
different prices to different buyers based on
their willingness to pay.
Price discrimination can raise economic welfare
and lessen deadweight losses.