Monopoly and how it Arises
A monopoly is a market with a single firm that produces a good or service for which no close substitute exists and that
is protected by a barrier that prevents other firms from selling that good or service.
Legal, natural, or ownership constraints that protect a firm from potential competitors are called barriers to entry.
A legal monopoly is a market in which competition and entry are restricted by the granting of a public franchise,
Natural barriers to entry create natural monopoly which is a market in which economies of scale enable one firm to
supply the entire market at the lowest possible cost.
All monopolies face a trade off between price and quantity sold, to sell a larger quantity, the monopoly must charge a
A single price monopoly is a firm that must sell each unit of its output for the same price to all its customers.
Price discrimination is the practice of selling different units of a good or service for different prices.
A Single Price Monopoly’s Output and Price Decision
A monopolist faces the market demand curve.
A monopolist’s demand curve is downward sloping.
The table shows the market demand schedule for Bobbie’s barbershop, the sole supplier of haircuts.
Total revenue is the price multiplied by the quantity sold and marginal revenue is the change in total revenue resulting
from a one-unit increase in the quantity sold.
A single price monopoly always charges a price at which demand is elastic. Why? Because if demand is inelastic, the
monopoly can produce less, raise its price and earn greater profit.
The top figure shows that economic profit is maximized by producing 3 harircuts an hour.
o The profit maximizing output also can be found as the quantity at which marginal cost equals marginal
The bottom figure shows that marginal cost equals marginal revenue at 3 haircuts an hour.
o Economic profit is 12 dollars an hour.
o The figure also shows how a monopoly sets price.
o Find the profit maximizing output at the intersection of the marginal cost and marginal revenue curves and the
price comes from the demand curve.
o Hence, the price is 14 dollars per haircut
Single-Price Monopoly and Competition Compared
Does a monopoly produce the same quantity and charge the same price as firms in perfect competition?
o The firms in a perfectly competitive industry are bought up by a single firm, a monopoly
o What happens to price and quantity?
The demand curve is D and the supply curve is S = MC
The industry produces the quantity Qc and sells it for price Pc o Now the industry becomes a monopoly.
The supply curve of the competitive industry becomes the marginal cost curve of the monopoly.
The demand curve of the competitive industry becomes the monopoly’s demand curve.
The monopoly also faces the marginal revenue curve MR.
The monopoly maximizes profit by producing the quantity Qmr which sells for Pm.
Compared to the perfectly competitive firms, a single price monopoly restricts output and charges a
The top figure shows the consumer surplus and producer surplus that is received in a perfectly competitive industry.
o At the competitive equilibrium, marginal social benefit equals marginal social cost and the sum of consumer
surplus and producer surplus is maxed.