The Monopoly Firm

Perfect Competition vs. Monopoly  Perfect competition leads to an optimum allocation of resources in the long run  Even though the perfect competitor’s goal is to maximize profits, in the long run the perfect competitor makes no economic profits- only normal profits. Also productively and allocatively efficient!

Perfect Competition vs. Monopoly  When a monopolist attempts to maximize profits, the result is a misallocation of resources.  In the long run, the monopoly may make an economic profit and is not allocatively or productively efficient.

Monopoly Basics  Monopolist is a price seeker (price searcher)  The monopoly can charge any price it wants, but it cannot repeal the law of demand:  If monopolist raises the price, it will sell less  If monopolist lowers the price, it will sell more

Elasticity Coefficients  e d= % change in quantity demanded/% change in price  Midpoint or Arc Method: e d=  ∆Q/((Q+Q1)/2)  ∆P/((P+P1)/2)  What the coefficients mean:  e d > 1 Elastic  e d < 1 Inelastic  e d = 1 Unit elastic

Monopolist Demand and Marginal Revenue Curves

Marginal Revenue Reminder  The marginal revenue on an additional unit at the lower price can never equal the old (higher) price, so the marginal revenue will always lie below the demand curve