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ECN 201: Principles of Microeconomics
Nusrat Jahan
Lecture-8
Monopoly
Monopoly
A monopoly is a market with a single firm that produces a good or service for which no
close substitute exists and that is protected by a barrier that prevents other firms from
selling that good or service.
Monopoly arises for the following reasonsA key resource is owned by a single firm.
The government gives a single firm the exclusive right to produce some good or servicepublic franchise, government license, patent, copyright.
The costs of production make a single producer more efficient than a large number of
producers- Natural Monopoly
Natural Monopoly- An industry is a natural monopoly when a single firm can supply a
good or service to an entire market at a smaller cost than could two or more firms.
A firm with a high fixed cost and very small variable/marginal cost.
There are economies of scale over the relevant range of output.
Monopoly Pricing and Output Decision
Profit maximization condition for monopolist: MR = MC
Marginal revenue is very different for monopolies from what it is for competitive
firms. When a monopoly increases the amount it sells, it has two effects on total
revenue (P Q)
 The output effect: More output is sold, so Q is higher.
 The price effect: The price falls, so P is lower.
MONOPOLY VERSUS COMPETITION
1. Demand Curve:
A competitive firm takes the price as given and faces a horizontal demand curve
A monopoly has the ability to influence the price of its output and hence faces a
downward sloping demand curve
2. Price and output decision:
Perfectly competitive firm maximizes profit where P = MC
Monopolist maximizes profit where
MR = MC