2. Single Seller in the Market
No close substitutes
Price MAKER
Blocked Entry
Non-Price Competition
3. PURE Monopolies are RARE…
Local water suppliers—whether Government owned
or privately owned
Cable TV
DeBeers Diamond
Intel ---computer chips
Microsoft---basic operating software
4. IMPORTANT:
A Monopoly DOES NOT have a SUPPLY CURVE!!!
Its MARKET DEMAND CURVE is going to determine
the QUANTITY that the Monopolist is going to supply
5. MonopolyPrice
Of
___
Quantity of _______
DM*
1 2 3 4 5 6 7 8
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
0 $11
1 $10
2 $9
3 $8
4 $7
5 $6
6 $5
7 $4
8 $3
x
x
x
x
x
x
x
x
x
PricePriceQuantityQuantity
This data
determines
our Demand
Curve for the
Monopolist
The Monopolist faces a
Downward sloping Demand
Curve because if it wants to
Sell more output it must
Lower its price.
6. MonopolyPrice
Of
___
Quantity of _______
DM*
1 2 3 4 5 6 7 8
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
Total Revenue
(P X Q)
Total Revenue
(P X Q)
0 $11 $0 $0
1 $10 $10 $10
2 $9 $18 $9
3 $8 $24 $8
4 $7 $28 $7
5 $6 $30 $6
6 $5 $30 $5
7 $4 $28 $4
8 $3 $24 $3
x
x
x
x
x
x
x
x
x
PricePriceQuantityQuantity
Average
Revenue
TR/Q
Average
Revenue
TR/Q
= AVERAGE REVENUE
NOTE: PRICE =AVERAGE REVENUE
DEMAND CURE = AVERAGE REVENUE CURVE
7. MonopolyPrice
Of
___
Quantity of _______
MR
D*=Average Revenue
1 2 3 4 5 6 7 8
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
Total Revenue
(P X Q)
Total Revenue
(P X Q)
Marginal Revenue
(ΔTR/ΔQ)
Marginal Revenue
(ΔTR/ΔQ)
0 $11 $0 $0 $0
1 $10 $10 $10 $10
2 $9 $18 $9 $8
3 $8 $24 $8 $6
4 $7 $28 $7 $4
5 $6 $30 $6 $2
6 $5 $30 $5 $0
7 $4 $28 $4 $-2
8 $3 $24 $3 $-4
x
x
x
x
x
x
x
x
x
PricePriceQuantityQuantity
x
x
x
x
x
x
x
x
Average
Revenue
TR/Q
Average
Revenue
TR/Q
When MR is plotted, remember
Marginal means “each additional.”
The MR (determined by looking at the “
Price” axis) is going to fall in
Between the numbers because you
Are moving from one to the other.
When MR is plotted, remember
Marginal means “each additional.”
The MR (determined by looking at the “
Price” axis) is going to fall in
Between the numbers because you
Are moving from one to the other.
8. Monopoly Total Revenue
(P X Q)
Total Revenue
(P X Q)
0 $11 $0 $0 $0
1 $10 $10 $10 $10
2 $9 $18 $9 $8
3 $8 $24 $8 $6
4 $7 $28 $7 $4
5 $6 $30 $6 $2
6 $5 $30 $5 $0
7 $4 $28 $4 $-2
8 $3 $24 $3 $-4
PricePriceQuantityQuantity
Average
Revenue
TR/Q
Average
Revenue
TR/Q
Marginal Revenue
(ΔTR/ΔQ)
Marginal Revenue
(ΔTR/ΔQ)
· A monopolist faces a downward
sloping Demand curve. The firm D curve
is the market D curve!
· A monopolist can sell additional output
only by lowering its price (due to
the law of demand).
· A monopolist must lower the price of
all of its output, not just the
marginal units, since it is a single-price
seller.
· As a result, as output increases, the
firm's marginal revenue falls faster
than the price.
9. Monopoly Total Revenue
(P X Q)
Total Revenue
(P X Q)
0 $11 $0 $0 $0
1 $10 $10 $10 $10
2 $9 $18 $9 $8
3 $8 $24 $8 $6
4 $7 $28 $7 $4
5 $6 $30 $6 $2
6 $5 $30 $5 $0
7 $4 $28 $4 $-2
8 $3 $24 $3 $-4
PricePriceQuantityQuantity
Average
Revenue
TR/Q
Average
Revenue
TR/Q
Marginal Revenue
(ΔTR/ΔQ)
Marginal Revenue
(ΔTR/ΔQ)
Look at the “PRICE” column
and the “Marginal Revenue “column
Look at the “PRICE” column
and the “Marginal Revenue “column
10. Monopoly Total Revenue
(P X Q)
Total Revenue
(P X Q)
0 $11 $0 $0 $0
1 $10 $10 $10 $10
2 $9 $18 $9 $8
3 $8 $24 $8 $6
4 $7 $28 $7 $4
5 $6 $30 $6 $2
6 $5 $30 $5 $0
7 $4 $28 $4 $-2
8 $3 $24 $3 $-4
PricePriceQuantityQuantity
Average
Revenue
TR/Q
Average
Revenue
TR/Q
Marginal Revenue
(ΔTR/ΔQ)
Marginal Revenue
(ΔTR/ΔQ)
As we move from the
production of the 1st unit to
the 2nd
unit, the price (and
AVG Revenue) drops from
$10 to $9 but the MR drops
to $8. Why???
If we sell the 2nd
unit for
$9.00 then we get $9.00 in
revenue for that unit. BUT if
we sell that unit for $9.00
THEN we must sell the 1st
Unit for $9.00 as well and we
will “LOSE “$1.00 on that
unit. So the $9.00 we get for
unit 2 minus the $1.00 we
lose for unit one gives us a
change in revenue (MR) of
$8.00…
11. Monopoly Total Revenue
(P X Q)
Total Revenue
(P X Q)
0 $11 $0 $0 $0
1 $10 $10 $10 $10
2 $9 $18 $9 $8
3 $8 $24 $8 $6
4 $7 $28 $7 $4
5 $6 $30 $6 $2
6 $5 $30 $5 $0
7 $4 $28 $4 $-2
8 $3 $24 $3 $-4
PricePriceQuantityQuantity
Average
Revenue
TR/Q
Average
Revenue
TR/Q
Marginal Revenue
(ΔTR/ΔQ)
Marginal Revenue
(ΔTR/ΔQ)
As we move from the
production of the 3rd unit to
the 4th unit, the price (and
AVG Revenue) drops from $8
to $7 but the MR drops to $4.
Why???
If we sell the 4th unit for
$7.00 then we get $7.00 in
revenue for that unit. BUT if
we sell that unit for $7.00
THEN we must sell Units 1,2,3
Unit for $7.00 as well and we
will “LOSE “$1.00 on each of
those units. So the $7.00 we
get for unit 4 minus the $3.00
we lose for units 3,2,1 gives
us a change in revenue (MR)
of $4.00…
12. Monopoly Total Revenue
(P X Q)
Total Revenue
(P X Q)
0 $11 $0 $0 $0
1 $10 $10 $10 $10
2 $9 $18 $9 $8
3 $8 $24 $8 $6
4 $7 $28 $7 $4
5 $6 $30 $6 $2
6 $5 $30 $5 $0
7 $4 $28 $4 $-2
8 $3 $24 $3 $-4
PricePriceQuantityQuantity
Average
Revenue
TR/Q
Average
Revenue
TR/Q
Marginal Revenue
(ΔTR/ΔQ)
Marginal Revenue
(ΔTR/ΔQ)
As we move from the production
of the 7th unit to the 8th unit, the
price (and AVG Revenue) drops
from $4 to $3 but the MR drops to
$-4. Why???
If we sell the 8th unit for $3.00
then we get $3.00 in revenue for
that unit. BUT if we sell that unit
for $3.00 THEN we must sell Units
7,6,5,4,3,2,1 Units for $3.00 as
well and we will “LOSE “$1.00 on
each of those units. So the $3.00
we get for unit 8 minus the $7.00
we lose for units 7,6,5,4, 3,2,1
gives us a change in revenue (MR)
of $-4.00 ($3.00 minus $7.00)
BOTTOM LINE: Marginal Revenue
Will ALWAYS be less than the price
Because the price of the previous
Units has to decrease as the price
Of the last (or marginal) unit
Decreases…Marginal Revenue
Curve is going to ALWAYS lie INSIDE
Of the Demand Curve….
13. 1 2 3 4 5 6 7 8
Total
Revenue
30
25
20
15
10
5
0
x
x
x
x x x x
x
The Total Revenue Curve reaches
It’s peak when Total Revenue is at
It’s maximum. NOTE: Total Revenue
Is MAXIMIZED when MR=0 , REPEAT,
Total Revenue is MAXIMIZED when
MR=0!!!!!!!
The Total Revenue Curve reaches
It’s peak when Total Revenue is at
It’s maximum. NOTE: Total Revenue
Is MAXIMIZED when MR=0 , REPEAT,
Total Revenue is MAXIMIZED when
MR=0!!!!!!!
17. MonopolyPrice
Of
___
Quantity of _______
MR
D*
AT
C
MC
Pm
Qm
ATC
*
The Price the Monopolist gets for ALL
The units of this good they produce (Qm)
is Pm but the ATC of producing ALL units
of the good is LESS than the Price they get
For the good. To find the ATC we look
Where the vertical line indicating the Profit
Maximizing Quantity CROSSES the ATC Curve
23. We can get an idea of the social cost of monopoly if we
were to look at the Monopoly Graph.
We know in Prefect Competition Price (MR,AR, D)=
MC at the lowest point of the ATC (this is LONG
RUN situation f or a Perfect Competitor)
Lets Assume THREE things:
Govt now regulates this Monopoly
They want to achieve ALLOCATIVE EFFICIENCY
They want to achieve PRODUCTIVE EFFICIENCY
24. MonopolyPrice
Of
___
Quantity of _______
MR
D*
AT
C
MC
Pm
Qm
ATC
*
Economic Profit
Notice the FIRM is STILL
Making Economic Profits,
Even though P=MR=AR=D
P1
Qs.o.
If Price = MC then the
Market is achieving
ALLOCATIVE EFFICIENCY.
This means consumers are
Paying for and producers are
Producing the Quantity
Society desires.
The Monopolist
Does NOT do this on its own!
Notice: The MONOPLY STILL
Earns ECONOMIC PROFITS!!
Notice: The MONOPLY STILL
Earns ECONOMIC PROFITS!!
25. MonopolyPrice
Of
___
Quantity of _______
MR
D*
AT
C
MC
Pm
Qm
ATC
*
Economic Profit
Now lets assume the Regulators
Want to ACHIEVE PRODUCTIVE
EFFICIENCY…The monopolist
Would be required to produce
Where P=ATC = MR=D
P1
Qs.o.
If Price = lowest point on ATC
then the Market is achieving
PRODUCTIVE EFFICIENCY.
This means consumers are
Paying for and producers are
Producing the Quantity
At the LOWEST POSSIBLE PRICE.
The Monopolist would NOT do this
On its own
P=
Qs.o.1
27. Economic losses by a monopolist:
P,costs
Q
D=AR=P
MR
ATC
MC
P1
ATC1
Loss
Q1
Monopolist experiencing losses
AVC
Monopoly
Profit maximization
The Shut-down Rule:
If the price at the profit-maximizing level of output is lower than the firm's average variable cost,
then the firm would minimize its losses by shutting down. When P<AVC, the firm cannot even
cover its variable costs of production
This monopolist experienced an increase in
costs that eliminated its profits.
The area of loss equals the firm's (ATC -
AR) x Q.
In what case would this monopolist shut
down?
28. Monopoly
Profit maximization
P,costs
Q
D=AR=P
MR
ATC
MC
AVC
P1 =
ATC1
Q1
Monopolist
breaking even
A monopolist breaking even:
The firm is producing at the profit-
maximizing level of output, where
MR=MC
At Q1 the firm's ATC equals its
average revenue. The firm is
covering all its explicit costs and
earning a normal profit, but there
are no economic profits.
If demand increases or if the firm lowers its costs,
economic profits will be restored.
29. D
Q
ATC / P
(Million $)
Nuclear Power Plants
ATClr
70
40
1 4 8
150
If Demand intersects long-run
average total costwhile it is still
downward sloping, then economies
of scale present a barrier to entry.
Society is better off (more
productively efficient) with only one
firm producing this product.
This situation is known as a Natural
Monopoly
Suppose total demand for nuclear power plants is 8 units.
·It would cost one firm a total of $320m [8x40] to build eight plants
·It would cost two firms a total of $560m [2(4x70)] to build eight plants
·It would cost 8 small firms firms a total of $1,200m [8(150)] to build eight plants
The most efficient (least cost) production is achieved when only one firm produces all eight power plants.
Building power plants requires large economies of scale. Total cost is minimized when one large firm builds all
the plants.
Monopoly
Natural Monopoly
Natural Monopoly:
30. Quantity
Costs/Price
Natural Monopoly
Qm
Qfr
D=AR=P
MR
ATC
MC
Pm
Qso
Pso
Pfr
Pm/Qm - the price/output combination of the
unregulated monopolist
Pso/Qso - the socially optimal price/output
combination
Pfr/Qfr - the "fair-return" or break-even
price set by the government
Who? -
·Natural monopolistic industries
·Product is considered a necessity to
consumers i.e. electric utilities, natural
gas, etc...
Why?
·Because of economies of scale, only
one firm is likely to produce
·When firm produces at the profit-
maximizing level of output, P>MC,
meaning there is an under-allocation of
resources in this market.
·Not enough is produced and the price is
higher than socially optimal.
Monopoly
Natural Monopoly - Regulated by Government
Sometimes the government regulates a firm's price or output decisions in order to achieve a more
equitable or efficient allocation of resources towards certain goods or services.
How can the government regulate?
The government may set a price ceiling equal to the socially optimal price (P=MC).
OR equal to the firm's ATC, so that the firm can earn a normal profit. This is called fair return price
Blog Post: "To regulate or not to regulate"
31. Monopoly
Price discrimination
Price discrimination: The charging of different prices to different
consumers for the same product.
Perfect price discrimination: When every consumer pays exactly what
he or she is willing to pay. The consumer has NO consumer surplus.
Conditions that must exist for price discrimination to occur:
·Monopoly Power: possible only when a firm has market power
·Market segregation: firm must be able to segregate buyers based on their
willingness to pay for the product, or their elasticities of demand
·No resale: the original buyer cannot be able to resell the product, or else they
could undermine the the monopolist's market power
Blog posts: "Price Discrimination"
32. Airline ticket pricing: Prices based on when ticket is bought, whether the traveller stays over a
weekend, length of stay, etc...
Movie theaters: Matinee prices, senior and teen discounts, concession stands get more money from
those whose willingness to pay for the movie experience is higher.
Golf courses and ski resorts: Weekend vs. mid-week rates, age discounts
Grocery stores: use coupons to attract consumers with more elastic demand for particular groceries,
whose willingness to pay is lower.
Computer hardware and software: Microsoft and Apple offer student and educator discounts, since
they know such consumers' willingness to pay is less than some.
Discussion Question: If you were the manager of a monopolistic firm, why would you
LOVE to be able to practice perfect price discrimination?
Answer: By charging each consumer exactly what he or she is willing to pay, a firm maximizes the
difference between its marginal revenue and its marginal cost. For each unit of output, the firm sells
it to whoever is willing to pay the most. Thereby total profits are maximized and consumers
experience ZERO surplus. Welfare is thereby transferred from consumers to the monopolist.
Monopoly
Price discrimination
Examples of price discrimination:
Blog Post: "Price Discrimination 101"
33. P,costs
Q
D=AR=P
MR
ATC
MC
P1
ATC1
Economic Profit
Qm
Single price monopolist
P,costs
Q
MR=D=AR=P
ATC
MC
ATC1
Economic Profit
Qpd
Price discriminating monopolist
P=MC
P=MC at the last unit sold ~
Allocative Efficiency!
Monopoly
Consequences of price discrimination
·More profit for the firm: green triangle bigger than the green rectangle
·More output: Qpd is greater than Qm
·Zero consumer surplus: only in perfect price discrimination
·Greater allocative efficiency: the last price paid equal MC
When a firm can perfectly price discriminate, it will charge each customer exactly what he is
willing to pay. Therefore, MR = Price, since the firm does not have to lower the price of all
previous units to sell additional output. P=MC=MR
34. Monopoly
Practice Free Response Question
ATC
MC
D
MR
P5
P4
P3
P2
P1
Q1
Q2
Q3 Q4 Q5
P/C
Q
The diagram to the right shows the cost and
revenue curves for a monopoly.
(a) How does a monopolist determine its profit-
maximizing level of output and price?
(b) Using the information in the graph, identify each of
the following for the monopolist.
(i) The profit maximizing level of output
and price
(ii) The line segment of the demand
curve that is elastic
(c) Suppose that the industry depicted in the graph
became perfectly competitive without changing the
demand or cost curves. Identify the equilibrium price
and output that would prevail in the perfectly
competitive market.
(d) Using the information in the graph, identify the area of consumer surplus for each of the following.
(i) The profit-maximizing monopoly
(ii) The perfectly competitive industry
(e) Define allocative efficiency
(f) To be allocatively efficient, what level of output should the monopolist produce?
(g) Should the government use a per-unit tax or a per-unit subsidy to lead the monopolist to produce the allocatively efficient
level of output? Explain how this tax or subsidy would achieve the allocatively efficient level of output?
