1. McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. A Monopolistic Market
Monopoly is a market structure in which one firm makes up the entire market
Barriers to entry into the market prevent competition
Barriers to entry can be:
Legal
Sociological
Natural
Technological
There are no close substitutes for the monopolist’s product
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3. The Key Difference Between a Monopolist and a Perfect Competitor
A monopolistic firm’s marginal revenue is not its price
Marginal revenue is always below its price
Marginal revenue changes as output changes and is not equal to the price
A monopolistic firm’s output decision can affect price
There is no competition in monopolistic markets so monopolists see to it that monopolists, not consumers, benefit
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4. Profit Maximizing Level of Output
The goal of the monopolistic firm is to maximize profits, the difference between total revenue and total cost
The monopoly maximizes profit when marginal revenue equals marginal cost
Marginal revenue (MR) is the change in total revenue associated with a change in quantity
Marginal cost (MC) is the change in total cost associated with a change in quantity
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5. Profit Maximizing Level of Output
The profit-maximizing condition of a monopolistic firm is:
MR = MC
For a monopolistic firm, MR < P
A monopolistic firm maximizes total profit, not profit per unit
If MR > MC,
The monopoly can increase profit by increasing output
If MR < MC,
The monopoly can increase profit by decreasing its output
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6. Monopolistic Profit Maximization Graph
Marginal revenue is not constant as Q increases because:
revenue increases as the monopolist sells more
revenue decreases because the monopolist must lower the price to sell more P MC
D at Qprofit max
P = $24
Find output where
MC = MR, this is the profit maximizing Q
MC = MR
Find how much consumers will pay where the profit max Q intersects demand, this is the monopolist price D MR Q
4 = Qprofit max
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7. Monopoly Compared to Perfect Competition Graph
In a monopoly, P>MR,
In perfect competition, P=MR=D
MR=MC is the profit max rule for both P MC
First find the monopoly Q and P PM
PPC
Then find the perfectly competitive Q and P
DPC= MRPC DM
Outcome: Monopoly output is lower and price is higher than perfect competition
MRM Q QM
QPC
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8. The Welfare Loss from a Monopoly
The welfare loss from a monopoly is represented by the triangles B and D
The rectangle C is a transfer of surplus from the consumer to the monopolist
The area A represents the opportunity cost of diverted resources, which is not a loss to society P MC PM C D
PPC B D A MR Q QM
QPC
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9. The Price-Discriminating Monopolist
When a monopolist price discriminates, it charges different prices to different individuals or groups of individuals
Consumers with less elastic demands are charged higher prices.
Consumers with more elastic demands are charged lower prices
Price discrimination increases output and profits
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10. The Price-Discriminating Monopolist
Examples of price discrimination
Movie discounts to senior citizens and children
Airline discounts for Saturday-night stay overs
Cars are seldom sold at list price
Tracking consumer information and pricing accordingly
These markets are highly susceptible to price discrimination because the market demand is made up of distinguishable individuals who have different demand elasticites
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11. Barriers to Entry Natural Ability
A firm is better at producing the good than anyone else
Economies of Scale
Natural monopoly is when a single firm can produce at a lower cost than can two or more firms
Government-Created Monopolies
Patents, licenses, and franchises
If there were no barriers to entry, profit-maximizing firms would always compete away monopoly profits
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12. A Natural Monopoly Graph
Average Cost
One firm producing Q1 has average cost C1
If two firms share the market, each produces Q0.5 and has average cost C0.5
If three firms share the market, each produces Q0.33 has average cost C0.33
C0.33
C0.5 C1
ATC Q
Q0.33
Q0.5 Q1
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13. A Natural Monopoly Graph, Profit and Regulation
A natural monopolist produces QM and charges PM, therefore earning a profit
Average Cost
If there is government regulation and a competitive solution where P = MC is required, the monopolist produces QC and charges PC, therefore earning a loss PM
Profits CM CC
ATC
Losses PC MR MC D Q QM QC
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14. Normative Views of Monopoly
Monopolies are unjust because they restrict freedom to enter business
Monopolies transfer income from “deserving” consumers to “undeserving” monopolists
Monopolies cause potential monopolists to waste resources trying to get monopolies
Rent-seeking activities
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15. Government Policy and Monopoly: AIDS Drugs
A few companies have patents for AIDS drugs that enable them to charge high prices because demand is inelastic
Policy Options
Government regulation where price = marginal cost benefits society, but discourages research
Government purchase of the patents and allowing anyone to produce the drugs so their price = marginal cost. This is expensive for taxpayers.
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