Lecture: Monopoly Characteristics

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2 Apr 2012
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MICROECONOMICS
Monopoly
Overview
- origins of monopoly
- single-price vs. discriminating monopolies
- determination of output and price
- profit and efficiency
Introduction
- monopoly: market with two key features:
o no close substitutes exist
o one supplier is protected from competition by entry barriers
Barriers to Entry
A. Natural Barriers to Entry
- natural monopoly: industry in which economies of scale enable one firm to
supply the entire market at the lowest possible cost
- economies of scale are so powerful that they are still achieved even when the
entire market demand is met
o LRAC cruve slopes downwards even when it meets the demand curve
B. Ownership Barriers to Entry
- one firm owns a significant portion of a key resource
o example: DeBeers and diamonds
C. Legal Barriers to Entry
- legal monopoly: market in which competition and entry are restricted by the
granting of:
o public franchise (ex: Canada Post)
o government license (ex: law or medical license)
o patent or copyright
Single-Price Monopoly
- firm must sell each unit of its output for the same price to all customers
- monopoly is a price setter opposite of perfect competition; price taker
o reason is that demand = market demand
o P = QD
Revenue
- total revenue = Price x Quantity Sold
o marginal revenue = change in total revenue from a one-unit increase in
quantity sold
MR < P at every output level
Marginal Revenue and Elasticity
- elastic demand: P causes TR
o positive MR
- inelastic demand: P causes TR
o negative MR
- unit elastic demand: P causes no change in total revenue
o MR = 0
total revenue is maximized
- in a monopoly, demand is always elastic
o if firm produced at an inelastic output, it could TC, TR, and
economic profit by output
© 2010 Pearson Education Canada
The marginal revenue
curve, MR, passes
through the red dot
midway between 2 and 3
units and at $10.
You can see that MR < P
at each quantity.
A Single-PriceMonopoly’sOutputand
Price Decision
From the graph…
- Price goes from $16 to $14
- lose $4 in revenue per unit
that would have been sold for
$16
- gain $14 per extra unit sold
- total revenue increases by $10
o marginal revenue
Price and Output Decision
- monopoly faces same technology constraints, but different market constraints than
in competitive firms
o profit maximized when MR = MC and TR – TC is greatest
economic profit = profit per unit x quantity produced
- in the case of monopolies, economic profit can be made even in the long run, as
barriers to entry protect it from competition
o economic losses have the same effect as in competitive markets
Comparing Price and Output
A. Demand Curve
- market demand curve in perfect
B. Supply Curve
- market supply curve in perfect competition is the MC curve for monopoly firm
o in perfect competition, horizontal sum of individual firms’ MC curves
S = MC
Comparing Perfect Competition and Single-Price Monopoly
- PC equilibrium occurs when QD = QS
- SPM equilibrium output occurs when MR = MC and equilibrium price occurs
at the profit-maximizing point on the demand curve
o compared to PC, SPM has output and P
- PC market demand curve = MSB curve; market supply curve = MSC curve
o efficiency occurs when MSC = MSB
total surplus is maximized
- SPM price exceeds MSC, so MSB exceeds MSC
o deadweight loss
some of the lost CS goes to the monopoly as PS