is a situation in which there is a single seller of a product for which there are no good substitutes.
When a monopoly exists, there are generally high barriers to entry into the industry. What are the reasons for these barriers?
(1) Legal Barriers u u patent - grant of an exclusive right to use a specific process or produce a specific product for a period of time (17 years in the U.S.) u u licenses and franchises - permission, granted by a government, to enter an industry or occupation
(2) A single firm has sole control of a resource essential to an industry.
(3) Economies of Scale Costs per unit in an industry may be low only when a firm produces a lot of output. Consequently, small firms will be unable to enter the industry because costs are too high.
Market Demand Curve price quantity Demand Because the monopoly firm is the only seller of a good, the market demand curve for the good is the same as the demand curve for the firm’s product.
This is not true for the monopolist. Remember for a perfectly competitive firm: MR = P.
For a monopolist, MR < P. So the MR curve lies below the demand curve. Quantity Price TR MR 10 20 200 --- 11 19 209 9
Drawing the MR curve when the demand curve is a straight line: MR has the same Y-intercept and is twice as steep as the demand curve. $ quantity Demand MR
Determining the optimal output and price, and the maximum profit: 7 Steps
Monopoly Possibilities short run: positive profits, losses, or breaking even. long run: positive profits, or breaking even.
What is bad about monopoly? u u Consumer options are limited. u u Profits do not signal firms to enter the industry. (They can’t get in because of the barriers to entry.) u u There is allocative inefficiency. ( P > MC ) The monopolist does not produce all units that consumers value more than it costs to make them.