Download Chpt 8 PP

Monopoly
Economics for Today by Irvin Tucker, 6th edition
©2009 South-Western College Publishing
1
What will I learn
in this chapter?
How a monopolist
determines what price to
charge and how much to
produce to maximize
profit or minimize loss
2
What puzzles will I
learn to solve?
• Why doesn’t the monopolist
gouge consumers by charging
the highest price?
• How can price discrimination
be fair?
• Are medallion cabs in New
York City monopolists?
3
What is a monopoly
market structure?
• Single seller
• Unique product
• Impossible entry into
the market
4
What are the most
common monopolies?
Local monopolies are more
common real-world
approximations of the
model than national or
world market monopolies
5
What does it mean to
have a unique product?
There are no close
substitutes for the
monopolists product
6
What are some
examples of
impossible entry?
• Owner of a vital resource
• Legal barriers
• Economies of scale
7
What is the advantage
of economies of scale?
Because of economies of
scale, a single firm in an
industry will produce output
at a lower per-unit cost than
two or more firms
8
What is a
natural monopoly?
An industry in which
the long-run average
cost of production
declines throughout
the entire market
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What is unique about a
natural monopoly?
A single firm will produce
output at a lower per-unit
cost than two or more
firms in the industry
10
What is a price maker?
A firm that faces a
downward-sloping
demand curve
11
What is the difference
between monopoly and
perfect competition?
The D and MR curves
of the monopolist are
downward sloping; in
perfect competition
they are horizontal
12
What is unique about
the demand curve for
a monopolist?
The monopolist
demand curve and the
industry demand curve
are one in the same
13
15
10
5
Cost per Unit (dollars)
40
35
30
25
20
Minimizing Costs in a Natural Monopoly
5 firms
2 firms
1 firm
Quantity of Output
20
40
60
80
100
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What determines price
for a monopolist?
Demand
15
Why is MR < P for all but
the first unit of output?
To sell additional units,
the price has to be
lowered; this price-cut
applies to all units, not
just the last unit
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$-25
$-50
$-75
$-100
Price & Marginal Revenue
$75
$50
$25
0
Monopoly
2 4
6
8 10 12 14 16 18
Q
17
$400
$200
Total Revenue
$300
Monopoly
$100
2
4
6
8
10
12
14
16
18
Q
18
Where does a
monopolist produce to
maximize profit or
minimize losses?
MR = MC
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P
$200
$175
$150
$125
$100
$75
$50
MC
MR=MC
ATC
Profit
AVC
$25
D
MR
1 2
3
4
5
6
7
8
9
Q
20
P
$200
$175
$150
$125
MC
ATC
MR=MC
Loss
$100
$75
$50
AVC
$25
D
MR
1 2
3
4
5
6
7
8
9
Q
21
Can a monopolist
make a profit in the
long-run?
If the positions of a
monopolist’s demand and
cost curves give it a profit
and nothing disturbs
these curves, it can make
a profit in the long-run
22
What is
price discrimination?
The practice of a seller
charging different prices for
the same product not
justified by cost differences
23
What is arbitrage?
The practice of earning a
profit by buying a good at
a low price and reselling
the good at a higher price
24
Is price
discrimination unfair?
Many buyers benefit from
the discrimination by not
being excluded from
purchasing the product
25
Is monopoly efficient?
A monopolist is inefficient
because resources are
underallocated to the
production of its product
26
P
- Price Discrimination Market for average students
MR=MC
T1
MC
MR
Q1
D
Q
27
P
- Price Discrimination Market for Superior Students
MR=MC
T2
MC
MR
Q2
D
Q
28
Is perfect
competition efficient?
A perfectly competitive
firm that produces
where P = MC
achieves an efficient
allocation of resources
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P
Perfect Competition
MR=MC
MC
MR, D
Pc
Qc
Q
30
P
Monopolist
MR=MC
MC
Pm
MR
Qm
D
Q
31
How does monopoly
harm consumers?
It charges a higher price
and produces a lower
quantity than would be
the case in a perfectly
competitive situation
32
P Impact of Monopolizing and Industry
MR=MC
MC
Pm
Pc
MR
Qm Qc
D
Q
33
What is the case
against monopoly?
• Higher price
• Charges a Price > MC
• Long-run economic profit
• Alters the distribution of
income to favor monopolist
34
END
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