1 producer who controls the market
Nike (they are the only company that can make Nike shoes)
How do we end up with a monopoly?
Control a scarce resource
Increasing returns to scale lead to a natural monopoly
Government created barriers
Assume → monopoly
They can control prices and make them ridiculous
That’s not socially optimal. Poor consumers!
Recall marginal revenue
The amount of money earned for producing an additional unit
It is not marginal profit
For a perfectly competitive market, for one producer, MR = market price
If we look at the demand curve for a monopolistic company
What is the revenue earned for selling the first unit? The corresponding point for that
quantity on the demand curve What is the marginal revenue for selling the second unit? Not the corresponding
Hint: You must charge one price for all units!
MR = the corresponding point on the demand curve – the difference
between that corresponding point, and the corresponding point for the first unit
The price you set depends on how many units you’re selling. If you sell 1,
you can charge the corresponding price from the demand curve. But if you sell 2, you
have to charge the corresponding price for the second unit, for both the first and the
second unit. This takes out the money you could have earned from one sellin