1. MICROECONOMICS: Theory & Applications
Chapter 11: Monopoly
By Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
10th Edition, Copyright 2009
PowerPoint prepared by Della L. Sue, Marist College

2. Learning Objectives
Define monopoly and show what a monopolist’s demand and marginal revenue curves look like.
Explain why a monopolist’s profit-maximizing output is where marginal revenue equals marginal cost.
Describe why the extent to which a monopolist’s price exceeds marginal cost is larger the more inelastic the demand faced by the monopolist.
(continued)
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3. Learning Objectives (continued)
Understand why the shutdown condition applies to monopolies as well as to firms operating in a perfectly competitive market.
Outline the potential sources of monopoly power: absolute cost advantages, economies of scale, product differentiation, and regulatory barriers.
Explore the efficiency effects of monopoly from a static as well as a dynamic perspective.
Overview public policy toward monopoly.
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4. Terminology Monopoly – a market with a single seller
Monopoly power – some ability to set price above marginal cost
Price maker – a monopoly that supplies the total market and can choose any price along the market demand curve that it wants
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5. The Monopolist’s Demand Curve and Total Revenue [Figure 11.1]
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6. Table 11.1
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7. Table 11.2
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8. Profit-Maximizing Output of a Monopoly
Marginal revenue is always less than price when the demand curve slopes downward.
Profit is maximized where MR=MC.
Figure 11.2
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9. Profit Maximization [Figure 11.3]
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10. The Monopoly Price and Its Relationship to Elasticity of Demand
P = MC/[1 – (1/η)]
The smaller the demand elasticity, the greater the profit-maximizing price, relative to marginal cost.
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11. The Inverse Elasticity Pricing Rule [Figure 11.4]
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12. Further Implications of Monopoly Analysis
A monopoly has no supply curve.
A monopoly does not necessarily make positive economic profit.
A monopoly’s demand curve is elastic where marginal revenue is positive.
A profit-maximizing monopolist will always sell at a price where demand is elastic.
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13. Monopoly and the Shutdown Condition [Figure 11.5]
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14. Monopoly Demand, Marginal Revenue, and Total Revenue [Figure 11.6]
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15. Monopoly Power When There are Several Suppliers [Figure 11.7]
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16. Measuring Monopoly Power
Lerner Index – a means of measuring a firm’s monopoly power that takes the markup of price over marginal cost expressed as a percentage of a product’s price:
Lerner Index = (P – MC)/P
The Lerner index varies between zero and one.
The larger the Lerner index value, the greater a firm’s monopoly power.
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John Wiley & Sons, Inc.

17. Sources of Monopoly Power
What factors determine the extent to which a firm has monopoly power?
The elasticity of the market demand curve
If the market demand curve is perfectly elastic, any individual supplier has no monopoly power.
The elasticity of supply by other firms
The monopoly power of any one firm is more limited when there is a greater number of rival firms.
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18. Barriers to Entry
Barrier to entry – any factor that limits the number of firms operating in a market and thereby serves to promote monopoly power
Categories:
Absolute cost advantage
A situation in which an incumbent firm’s production cost (long-run average total cost) is lower than potential rivals’ production costs at all relevant output levels
Economies of scale
A situation in which the long-run average total cost curve for all firms slopes downward over the entire range of market output
Natural monopoly – an industry in which production cost is minimized if one firm supplies the entire output.
(continued)
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19. Barriers to Entry (continued)
Categories (continued):
Product differentiation
A means by which consumers may perceive the product sold by an incumbent firm to be superior to that offered by prospective rivals.
Regulatory barriers
Barriers to entry created by the government through vehicles such as patents, copyrights, franchises, and licenses
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20. Strategic Behavior by Firms: Incumbents and Potential Entrants [Figure 11.8]
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21. The Efficiency Effects of Monopoly [Figure 11.9]
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22. A Dynamic View of Monopoly and Its Efficiency Implications
Static analysis – a form of economic analysis that looks at the efficiency of a market at any one point in time
Dynamic analysis – a form of economic analysis that looks, over time, at the efficiency of a market
Figure 11.10
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23. Public Policy Toward Monopoly
Antitrust laws – a series of codes and amendments intended to promote a competitive market environment
3 major statutes:
Sherman Act (1890)
Clayton Act (1914)
Federal Trade Commission Act (1914)
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24. Regulation of Price
Price ceiling – eliminates the monopolist’s reason for restraining output
Figure 11.11
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25. The Math Behind Monopoly
The Monopolist’s Demand and Marginal Revenue Curves
MR = P(1 – 1/η)
The Monopolist’s Profit-Maximizing Output Choice
MR=MC
P + Q(dP/dQ) = dC/dQ
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