1. ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn
Department of Economics

2. Monopolist Demand Curve
Monopoly
• A single seller in a market  Rare
Monopolist Demand Curve D Q

3. Marginal revenue lies below demand for the monopolist.
Monopoly
Monopolist diagram MR
D = AR = P Q
Marginal revenue lies below demand for the monopolist.

4. Monopoly Example: QD P TR MR $172 -- 1 162 2 152 304 142 3 426 122 4
$172 -- 1
162 2
152
304
142 3
426
122 4
132
528
102 5
610 82 6
112
672 62 7
714 42 8 92
736 22 9
738 10 72
720
-18

5. Monopolist  - Maximizing Diagram
Monopoly
Monopolist  - Maximizing Diagram P MC
ATC C P0 A B D MR Q Q0

6. Monopolist  - Maximization
Monopoly
Monopolist  - Maximization P
ATC MC Q0 D MR P0 A C B Q
NOTE: Always set price from the demand curve.
 = TR – TC
= OPoCQo – OABQo
= APoCB
 will last to long run because there is no entry by competitors.

7. Monopolist Could Also Make A Loss
Monopoly
Monopolist Could Also Make A Loss P
ATC MC Q0 D MR P0 A C B Q
 = TR – TC
= OPoBQo – OACQo
= PoACB(shaded area)
 A LOSS

8. Special Case of Monopoly
Discriminating Monopoly or Price Discrimination
charging different prices to different customers for the same commodity.
Necessary Condition:
(1) Must have some monopoly power
(2) Must face at least two different demands
(3) Must be able to keep the two demand separate.

9. Reminder
Consumer Surplus is measured as the area above the price line and under the demand curve. Q P
Consumer Surplus D PO QO

10. Special Case of Monopoly
Discriminating Monopoly or Price Discrimination
Result:
Take away some consumer surplus.
Consumer surplus is difference between what a consumer actually pays for a commodity and what she/he would be willing to pay: A B
Q1 sells at P1 ; Q0 – Q1 sells at P0 .
P0P1AB is no longer consumer surplus, but rather is now part of total revenue for firm.

11. Special Case of Monopoly
Perfect Price Discrimination
Price will follow the Demand Curve.
OUTCOME:
Completely Eliminate Consumer Surplus.

12. Special Case of Monopoly
Market Structure Spectrum
Degree of Competition
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Concentration Ratio is a measure of market power:
is the the fraction of total market sales controlled by the industry’s largest firms.
— 4 - firm concentration ratio
— 8 - firm concentration ratio

13. Monopolistic Competition
Characteristics:
1. Lots of firms
2. Free entry and exit
3. Product differentiation D Q

14. Monopolistic Competition
The steepness of demand depends on the number of close substitutes. Q D
Perfect Competition Q D Q1 Q2 P1 P2
Monopolistic Competition
Monopoly Q D Q1 Q2 P1 P2

15. Monopolistic Competition
Profit-Maximizing in Monopolistic Competition in Short Run P MC
SRATC A P C B D MR Q Q
 = CPAB

16. Monopolistic Competition
Profit-Maximizing in Monopolistic Competition in Long Run P MC
LRATC A P D MR Q Q
 = TR – TC = OPAQ – OPAQ = 0

17. Term is Greek for “few sellers”
Oligopoly
Term is Greek for “few sellers”
— Is a type of industry where a few large firms account for the majority of sales.
— Their products are usually differentiated, but there are close substitutes.
— Most of the big brand name items that you are aware of are produced under oligopolistic conditions.
— There can be small sellers in these markets also, but the very large ones account for the vast majority of sales.

18. Oligopoly
Continued
—These firms are not price-takers, they are price-setters.
—They know that their competitions will react to what they do. So there is strategic behavior.
—Collusion is illegal, but frequently there is “tacit collusion”.

19. Profit-Maximizing Diagram for OligopolyMC
ATC B P0 A C D MR Q Q0
These profit can persist to the long-run because of barriers to entry.
 = CP0AB
P > MC

20. Barriers to Entry 1. Cost Advantage 2. Predatory Pricing
3. Advertising - Creating Brand Loyalties
4. Product Proliferation
5. Government Barriers – Licensing, etc.

21. THANK YOU!
HAVE A NICE DAY.