ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-8 Monopoly

Monopoly A monopoly is a market with a single firm that produces a good or service for which no close substitute exists and that is protected by a barrier that prevents other firms from selling that good or service. Monopoly arises for the following reasons-   A key resource is owned by a single firm. The government gives a single firm the exclusive right to produce some good or service- public franchise, government license, patent, copyright. The costs of production make a single producer more efficient than a large number of producers- Natural Monopoly Natural Monopoly- An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. A firm with a high fixed cost and very small variable/marginal cost. There are economies of scale over the relevant range of output.

Monopoly Pricing and Output Decision   Profit maximization condition for monopolist: MR = MC Marginal revenue is very different for monopolies from what it is for competitive firms. When a monopoly increases the amount it sells, it has two effects on total revenue (P xQ) The output effect: More output is sold, so Q is higher. The price effect: The price falls, so P is lower.

MONOPOLY VERSUS COMPETITION   1. Demand Curve: A competitive firm takes the price as given and faces a horizontal demand curve A monopoly has the ability to influence the price of its output and hence faces a downward sloping demand curve

Perfectly competitive firm maximizes profit where P = MC 2. Price and output decision:   Perfectly competitive firm maximizes profit where P = MC Monopolist maximizes profit where MR = MC

Deadweight Loss of a Monopoly: