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Lecture 16

Lecture 16-Monopoly

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

Description
Monopoly Definition: Single Seller (of product with no close substitutes) Barriers to entry (1) legal barriers (legal monopoly) - post office (first class mail) - patents (2) natural barriers (natural monopoly) Occurs when one firm can supply entire market at lower average cost than two or more firms Ù economies of scale over the relevant range Natural Monopoly Example: Pipeline One firm can produce for entire market at lower cost than 2 or more firms High fixed costs (pipeline) plus low marginal cost (maintaining pipeline) => ATC falls over relevant range Natural Monopoly 1. Economies of scale (declining ATC) = barrier to entry 2. If monopolist (say, gas pipeline) is making economic profits, will new firm enter? NO. 2nd firm would have higher ATC (as would 1st firm) if market is shared **Past Tests 2 posted on site www.notesolution.com Marginal Revenue: (MR) < Price (P) Å VERY IMPORTANT Because the market demand curve slopes downward, a monopolist must lower price to sell more output Market DD (P X Q) (¨75¨4 Price Quantity Total Revenue Marginal Revenue 10 0 0 9 1 9 -- 8 2 16 7 7 3 21 5 6 4 24 3 5 5 25 1 4 6 24 -1 3 7 21 -3 2 8 16 -5 1 9 9 -7 0 10 0 -9 Market DD and MR Schedule for Monopolist At Q = 2, MR = 7 < P = 8 At Q = 3, MR = 3 < P = 6 10 DD 2 4 6 if price is 6, demand is 4 MR 7 3 8 Q P www.notesolution.com P0 P = MR Q P To sell an additional unit of output, monopolist must lower price MR DD Perfectly competitive firm can sell an additional unit of output at an unchanged price q0 q1 P0 dd P1 Monopolist (Single Seller) DD P0 q0 q1 Perfectly Competitive Firm (Many Sellers) If person wants to increase output, must lower price If firm increases output, price remains the same (determined by all markets) www.notesolution.com Profit-Maximizing Output 1. Monopolist chooses profit-maximizing output (Qm) where MR = MC At Q1, MR > MC => expand output At Q2, MR < MC => contract output 2. To sell Qm, monopolist must change price PM. Observations: (1) 0RQRSROLVWFDQQRWFKDUJH³XQOLPLWHGSULFH´ (2) No supply curve (since monopolist is not a price taker) PM DD QM Q2 MC MR Q1 www.notesolution.comMonopoly Definition: Single Seller(of product with no close substitutes) Barriers to entry (1) legal barriers (legal monopoly) - post office (first class mail) - patents (2) natural barriers (natural monopoly) Occurs when one firm can supply entire market at lower average cost than two or more firms economies of scale over the relevant range Natural Monopoly Example: Pipeline One firm can produce for entire market at lower cost than 2 or more firms High fixed costs (pipeline) plus low marginal cost (maintaining pipeline) => ATC falls over relevant range Natural Monopoly 1. Economies of scale (declining ATC) = barrier to entry 2. If monopolist (say, gas pipeline) is making economic profits, will new firm enter? NO. 2 firm would have higher ATC (as would 1 firm) if market is shared **Past Tests 2 posted on site www.notesolution.com
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