2. Key Terms
• Pure monopoly occurs when there is a single
seller of a product that has no close
substitutes. No individual firm produces a
large enough share of the total market supply
to affect price/ monopoly, on the contrary, is
characterized by concentration of supply in
the hands of the owners of a single firm.
3. Key Terms
• Monopoly Power is the ability of a firm to
influence the price of its product by making
more or less of it available to buyers. It is the
main reason why there are barriers to entry
which are constraints that prevent additional
sellers from entering a monopoly firm’s
market. It exists when a single firm controls
25% or more of a particular market.
4. Key Terms
• Price Searchers are buyers and sellers having
large enough shares of a market such that
when they buy or sell more, they change the
market price.
• Public Franchise is the right granted to a firm
by government that permits the firm to
provide a particular good or service and that
excludes all others from doing the same
5. Characteristics of a Pure Monopoly:
1) A single seller, the firm and the industry are
synonymous.
2) Unique product
3) Profit maximized
4) Price maker
5) Price discriminator
6) Entry or exit is blocked
6. Types of Barriers to Entry:
1) Legal Restrictions
2) Patents
3) Control of Strategic Resource
7. Types of Cost Advantages:
1) Economies of Scale
2) Technological Superiority
8. Basic Elements
Marginal Revenue
A monopoly faces a downward-sloping demand curve: To sell more, it must
lower its price. Consider the table below:
Table 1 : The Effect of Price on Marginal Revenue
Demand Curve Revenue
Price Quantity Demanded Total Revenue(PxQ) Marginal Revenue
$10 1 $10 $10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
3 8 24 -4
2 9 18 -6
1 10 10 -8
9. Facts about Marginal Revenue:
1. Marginal Revenue = Price - Loss from Price Cut
on Prior Output.
2. MR < P whenever the firm has to cut its price to
sell more.
3. The firm will never produce where MR is
negative.
4. Total revenue is largest at the level of output at
which MR = 0.
5. When demand is elastic, more output increases
total revenue, and so MR > 0. In general we
have:
10. Facts about Marginal Revenue:
Table 2. How Elasticity of Demand Affects Marginal
Revenue
Elasticity Of Demand Marginal Revenue
Elastic (>1) Positive
Unitary (=1) Zero
Inelastic (<1) Negative
11. Facts about Marginal Revenue:
6) Because of 3 and 5 above, a firm will never
produce where the firm’s demand is inelastic.
7) If the demand schedule is a downward-sloping
straight line, then (a) the marginal revenue curve
is twice as steep as the demand curve and (b) the
MR curve intersects the bottom axis at half the
output the demand curve does.
8) The total revenue curve shows the total revenue
at each level of output. MR is the slope of the
total revenue curve.
15. Monopolies’ Fallacies and Facts
• Fallacies:
1. “Monopolies charge the highest price they
can get.”
2. “Monopolies always make a profit.”
3. “Monopolies produce where they make the
highest average profit per unit.”
16. Monopolies’ Fallacies and Facts
• Facts:
1. Monopolies do not necessarily produce at the
lowest average cost.
2. Monopolies produce only where demand is
elastic.
3. Price exceeds marginal cost.
4. A monopoly does not have a supply curve
5. Monopolies produce less than competitive firms
when costs are the same.
17. Price Discrimination
• So far we have assumed that monopoly sells
all its output for the same price. But the
monopoly may be able to charge a different
price for different units.
Price discrimination results in:
• More profits (because of the higher MR)
• More output (because of the higher MR)
18. Price Discrimination
• Perfect Price Discrimination occurs when the
monopoly gets the demand price for each
unit.
Two main methods of price discrimination:
• Method one: Volume Discounts
• Method two: Segregated Markets
19. Taxes and Monopolies
• Lump-Sum Tax
A lump-sum tax is a tax that is the same no
matter what the monopoly produces. Just as a
change in fixed costs has no effect on MC, a
lump-sum tax has no effect on MC and so has
no effect on the monopoly’s optimal output
where MR=MC or price.
20. Taxes and Monopolies
• Unit Tax
A unit tax is a tax per unit of output. It increases
MC. So it has the same effect as an increase in
wages or other variable costs.
