1 Monopoly Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing

2 What will I learn in this chapter? How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss

3 What puzzles will I learn to solve? Why doesn’t the monopolist gouge consumers by charging the highest price? How can price discrimination be fair? Are medallion cabs in New York City monopolists?

4 What is a monopoly market structure? Single seller Unique product Impossible entry into the market

5 What are the most common monopolies? Local monopolies are more common real-world approximations of the model than national or world market monopolies

6 What does it mean to have a unique product? There are no close substitutes for the monopolists product

7 What are some examples of impossible entry? Owner of a vital resource Legal barriers Economies of scale

8 What is the advantage of economies of scale? Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms

9 What is a natural monopoly? An industry in which the long-run average cost of production declines throughout the entire market

10 What is unique about a natural monopoly? A single firm will produce output at a lower per-unit cost than two or more firms in the industry

11 What is a price maker? A firm that faces a downward-sloping demand curve

12 What is the difference between monopoly and perfect competition? The D and MR curves of the monopolist are downward sloping; in perfect competition they are horizontal

13 What is unique about the demand curve for a monopolist? The monopolist demand curve and the industry demand curve are one in the same

Minimizing Costs in a Natural Monopoly Cost per Unit (dollars) 25 5 firms 2 firms 1 firm Quantity of Output

15 What determines price for a monopolist? Demand

16 Why is MR < P for all but the first unit of output? To sell additional units, the price has to be lowered; this price-cut applies to all units, not just the last unit

17 8 $-25 $-50 $-75 $ $25 $50 $ Monopoly D emand Marginal R evenue Q Price & Marginal Revenue

18 8 $200 $ $300 $ Monopoly Q Total Revenue

19 Where does a monopolist produce to maximize profit or minimize losses? MR = MC

20 $100 $75 $50 $ $125 $150 $175 $ ATC MC MR=MC D MR Profit AVC Q P

21 $100 $75 $50 $ $125 $150 $175 $ ATC MC MR=MC D MR Loss AVC P Q

22 Can a monopolist make a profit in the long-run? If the positions of a monopolist’s demand and cost curves give it a profit and nothing disturbs these curves, it can make a profit in the long-run

23 What is price discrimination? The practice of a seller charging different prices for the same product not justified by cost differences

24 What is arbitrage? The practice of earning a profit by buying a good at a low price and reselling the good at a higher price

25 Is price discrimination unfair? Many buyers benefit from the discrimination by not being excluded from purchasing the product

26 Is monopoly efficient? A monopolist is inefficient because resources are underallocated to the production of its product

27 Q1Q1 MC MR=MC D MR T1T1 - Price Discrimination - Market for average students P Q

28 Q2Q2 MC MR=MC D MR T2T2 P Q - Price Discrimination - Market for Superior Students

29 Is perfect competition efficient? A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources

30 QcQc MCMR=MC PcPc Perfect Competition MR, D P Q

31 QmQm MC MR=MC D MR PmPm Monopolist P Q

32 How does monopoly harm consumers? It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation

33 QmQm  MC MR=MC D PmPm Impact of Monopolizing and Industry P Q PcPc QcQc MR

34 What is the case against monopoly? Higher price Charges a Price > MC Long-run economic profit Alters the distribution of income to favor monopolist

35 END