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PRINCIPLES OF ECONOMICS
Chapter 9 Monopoly
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HISTORY
In the mid-nineteenth century, the United States, specifically the
Southern states, had a near monopoly in the cotton supplied to
Great Britain. These states attempted to leverage this economic
power into political power—trying to sway Great Britain to formally
recognize the Confederate States of America.
CHARACTERISTICS OF MONOPOLY
One seller of a good or service in the market
Legal monopolies are created because of legal
rights (patents and copyrights)
Natural monopolies are created by the government
since they operate with high fixed costs (public
utilities: gas, water, electricity)
NATURAL MONOPOLY
In this market, the demand curve intersects the LRAC
curve at its downward-sloping part.
A natural monopoly occurs when the quantity
demanded is less than the Minimum Efficient Scale.
The government permits the monopoly to operate, but
it would regulate it by setting P=LRAC and requires
profit to be invested in technological advancement for
the firm to be more efficient and lower AC producer.
NATURAL MONOPOLY
PERFECT COMPETITION VS. MONOPOLY
a) A perfectly competitive firm faces a horizontal
demand at the market price. The firm can sell
as much as it produces at the same price.
b) A monopolistic firm faces the entire market
demand. So, it has to choose a combination of
price and quantity that maximizes profits.
PERFECT COMPETITION VS. MONOPOLY
FIRM DEMAND AND MARGINAL REVENUE
Because the firm faces the market demand curve, its MR
lies beneath the demand curve and intersects the
horizontal axis at the middle of Q-intercept and zero.
PROFIT MAXIMIZATION
The profit maximizing price and quantity combination is
where the distance between TR and TC is largest.
PROFIT MAXIMIZATION
Profit maximization is also determined by the MR = MC
rule. If MR > MC, the firm raises quantity. If MC > MR,
the firm cuts quantity. Optimal quantity is where MR =
MC.
PRICE & QUANTITY DETERMINATION
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Set MR = MC to determine Q1.
Refer to the demand and vertical axis to determine P1.
Q1 and P1 are profit maximizing quantity and price.
At Q1 determine AC = P2.
P1 > P2 for the firm making excess profit = P2SR P1.
PRICE & QUANTITY DETERMINATION
At Q = 4
TR = 900*4 = 3,600
TC = 700*4 = 2,800
Total Profit: TR – TC = (900 – 700)*4 or 3,600 – 2,800
Total Profit = 800