1. CHAPTER 14 Monopoly PowerPoint® Slides by Can Erbil © 2004 Worth Publishers, all rights reserved

2. 2 What you will learn in this chapter: The significance of monopoly, where a single monopolist is the only producer of a good How a monopolist determines its profit-maximizing output and price The difference between monopoly and perfect competition, and the effects of that difference on society’s welfare Problems posed by monopoly What price discrimination is, and why it is so prevalent when producers have market power

3. 3 Types of Market Structure

4. 4 What a Monopolist Does

5. 5 Why Do Monopolies Exist? A monopolist has market power and as a result will charge higher prices and produce less output than a competitive industry. This generates profit for the monopolist in the short run and long run. Profits will not persist in the long run unless there is a barrier to entry. This can take the form of  control of natural resources or inputs,  economies of scale,  technological superiority, or  legal restrictions imposed by governments, including patents and copyrights.

6. 6 Economies of Scale Create Natural Monopoly

7. 7 Comparing the Demand Curves of a Perfectly Competitive Firm and a Monopolist

8. 8 A Monopolist’s Demand, Total Revenue, and Marginal Revenue Curves

9. 9 The Monopolist’s Profit- Maximizing Output and Price

10. 10 Monopoly versus Perfect Competition  P = MC at the perfectly competitive firm’s profit- maximizing quantity of output  P > MR = MC at the monopolist’s profit-maximizing quantity of output Compared with a competitive industry, a monopolist does the following:  Produces a smaller quantity: Q M < Q C  Charges a higher price: P M > P C  Earns a profit

11. 11 The Monopolist’s Profit Profit = TR − TC = (P M × Q M ) − (ATC M × Q M ) = (P M − ATC M ) × Q M

12. 12 Monopoly Causes Inefficiency

13. 13 Regulated and Unregulated Natural Monopoly

14. 14 Price Discrimination: Two Types of Airline Customers

15. 15 Price Discrimination: Two versus Three Different Prices By increasing the number of different prices charged, the monopolist captures more of the consumer surplus and makes a large profit.

16. 16 Perfect Price Discrimination

17. 17 The End of Chapter 14 coming attraction: Chapter 15: Oligopoly