Monopoly: a firm that is the sole seller of a product without close substitutes.
Monopolies are price makers.
Barriers to enter
Monopoly resources: a key resource required for production is owned by one
• Rare because of world markets. (diamonds/water in a small town?)
Government regulation: government gives one firm the exclusive right to
produce a good or service
• Patent(20 years)-meds or original invention- high prices to encourage
• Copyright- book or written work- high prices to encourage more writing
Production process: a single firm can produce output at a lower cost than a
larger number of producers.
• Natural monopoly: a monopoly arises because a single firm can supply a
good or service to an entire market at a smaller cost than could two or
• Water- must build pipe lines, so if many companies do this it will just be
more expensive.After each entry, the profit decreases because they still
need to pay the fixed cost, and have to split the benefits with others.
Monopolies can alter the price of its good by adjusting the quantity supplied.
Competitive firms: horizontal demand curve (market price) (perfectly elastic)
Monopoly: demand curve is the market demand curve. Choose anywhere on the
demand curve to produce at.
Total revenue: (P*Q)
Average revenue: (TR/Q)
Marginal revenue: (change in TR / change in quantity)
Amonopolist’s marginal revenue is always less than the price of its good.
When increasing amount sold, total revenue:
Output effect: more output sold, Q is higher, increase TR.
Price effect: price falls, so P is lower, decrease TR.
Price = avg revenue, demand curve = avg revenue curve.
Marginal revenue curve lies below the demand curve.
When MC < MR then the firm can produce more units.
Monopolist’s profit maximizing quantity of output is when MR = MC
MR / MC in a monopoly is < price
Profit = (P-ATC) X Q
After a paten