1. Warm-Up
Draw a correctly-labeled graph showing a monopoly operating at a loss in the short-run.

2. Monopolies and Public Policy
Chapter 14: Monopoly (pages )

3. Monopoly versus Competition
Monopolists produce less:
Monopolists charge higher prices
Monopolists earn profit in the long-run
QM < QC
PM > PC
p > 0

4. Problems with Monopoly
Beneficial trades do not occur
Consumer surplus is lost
Deadweight loss is created

5. Effects of Monopoly (a) Perfect Competition ( b )
Total Surplus with Monopoly
Price
Price
Consumer surplus with perfect competition
Consumer surplus with monopoly
Profit P M
Deadweight loss P
MC= ATC
MC = ATC C
Figure Caption: Figure 14-8: Monopoly Causes Inefficiency
Panel (a) depicts a perfectly competitive industry: output is QC, and market price, PC, is equal to MC. Since price is exactly equal to each producer’s average total cost of production per unit, there is no producer surplus. So total surplus is equal to consumer surplus, the entire shaded area. Panel (b) depicts the industry under monopoly: the monopolist decreases output to QM and charges PM. Consumer surplus (blue area) has shrunk: a portion of it has been captured as profit (green area), and a portion of it has been lost to deadweight loss (yellow area), the value of mutually beneficial transactions that do not occur because of monopoly behavior. As a result, total surplus falls. D D MR MR Q
Quantity Q
Quantity C M

6. Effects of Monopoly Loss of consumer surplus (consumers worse off)
Increase in producer surplus (producers better off)
Deadweight loss created (efficiency lost)

7. Natural Monopolies Price, cost
A natural monopoly can arise when fixed costs required to operate are very high  the firm’s ATC curve declines over the range of output at which price is greater than or equal to average total cost.
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even price A T C D
Quantity
Relevant output range
This gives the firm economies of scale over the entire range of output at which the firm would at least break even in the long run. As a result, a given quantity of output is produced more cheaply by one large firm than by two or more smaller firms.

8. Examples of Natural Monopoly
Gas company
Electric company
Cable company
Water company

9. How Government Responds…
Public Ownership
Often run poorly
No incentive to lower costs
Regulation
Set a price ceiling
Use market forces to reduce losses

10. Effect of Regulation ( b )
Total Surplus with a Regulated Natural Monopolist
(a)
Total Surplus with an Unregulated Natural Monopolist
Price
Price
Consumer surplus
Consumer surplus P
Profit P M M P P R A T C * R A T C MC MC D D MR MR Q Q
Quantity Q Q * M R M R
Quantity

11. Comparing Outcomes

12. Practice Time… Label monopoly PM and QM Identify area of p
Label competitive PC and QC
Label PR and QR where monopolist earns normal profit