ECON 2030 Chapter : Notes Chapter 15
Chapter 15 Lecture Notes
Monopoly June 20, 2011
Practice Problems (CH. 15): # 1-3, 6-8, 11-14
Market Structure
• One Seller
o Monopolists is the entire supply side of the market
o Has the ability to make/set own price
• Good with no close substitutes
o Demand will be quite inelastic
• High barriers to entry
o Copyright or patent (legal protection)
o Trademarks
o Exclusive contracts
▪ Example: LSU has an exclusive contract with Coca-Cola and only Coca-
Cola products may be sold on campus.
o Natural monopoly
▪ Very high fixed costs w.r.t. variable costs
▪ Example: to start an energy company (like Entergy), you need a
generating plant, a distributions plant, etc., but running power to a
single household (variable cost) is small in comparison.
▪ Another example: pharmaceuticals
o Implications
▪ If a monopolist is earning (+) econ profit in short run, they will still be
earning (+) econ profit in the long run.
Firm Behavior in the Short Run
• How much to produce?
o Q* = MR = MC
• What price to charge?
o P* on Demand Curve w.r.t. the Q* at MR=MC
• Profit?
o In the short run, anything can happen
Firm Behavior in the Long Run
• Case 1: P ≥ ATC
o Economic Profit is equal to zero or positive
o Q* > 0 (keep producing)
• Case 2: P < ATC
o Economic Profit is negative
o Q* = 0 (stop producing)
o If the Monopolist exits, the market will disappear
Monopolist’s Supply Curve
• The monopolist is unwilling to sell at a price higher (loss of business) or a price
lower (loss of profit)
• There is no supply curve!
Monopoly vs. Perfect Competition
• Monopolist charges a higher price for less quantity, compared to the market of
perfect competition
