March 30th Monopoly Daniel
- The following are two characteristics of a monopoly.
- A ﬁrm that is the sole seller of a product.
- The product it sells has no close substitutes.
- Unlike in a perfect competition a monopolist has market power.
- Market Power: the ability to inﬂuence the market price of the product it sells.
- The main cause of monopolies is barriers to entry, which are threefold:
- A single ﬁrm owns a key resource.
- The government gives a single ﬁrm the exclusive right to produce the good (patents,
- Natural monopoly (A single ﬁrm can produce the entire market Q at lower cost than
could several ﬁrms).
- In a competitive market, market demand curves slopes downward.
- Do not confuse “market” and “individual ﬁrm”.
- In a competitive market, individual ﬁrm’s demand is horizontal.
- In a monopoly, the demand curve slopes downward, because by deﬁnition, to be a monopoly,
one must be an “individual ﬁrm”.
- Increasing Q has two effects on a monopolist’s Marginal Revenue:
- Output Effect: higher output raises revenue.
- Price Effect: lower price reduces revenue.
- A competitive ﬁrm has an output effect, but not a price effect.
- Like a competitive ﬁrm, a monopolist maximizes proﬁt by producing the quantity where MR =
- Once the monopolist identiﬁes this quantity, it sets the highest price consumers are willing to
pay for that quantity March 30th Monopoly Daniel
- There is no supply curve for a monopoly because it is a “price-maker,” not a “price-taker” (Q
does not depend on Price).
- By charging higher prices, the monopoly gets more surplus and consumers get le