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ECO 2023
Chapter 10: Pure Monopoly
Monopoly
A market with a single seller with a product that is
differentiated from other products
Characteristics:
Single seller
o Firm and industry are synonymous
No close substitutes
o Product is unique in that there are no close
substitutes
Price maker
o Controls the total quantity supplied and thus
has considerable control over price
o Downward sloping demand curve
o Can change price by changing supply
Blocked entry
o Barriers to entry keep competitors out of the
market
o Those barriers are
 Economic
 Technological
 Legal
Nonprice competition
o Standardized or differentiated
Inelastic demand
Created: M. Mari
Fall 2007
Page 1 of 7
ECO 2023
Chapter 10: Pure Monopoly
Barriers to Entry
 Any impediment that prevents new firms from entering
an industry and competing on an equal basis with
existing firms
 Types of barriers
o Economies of Scale
 Declining average total cost with added firm
size are extensive
 Long run average total cost will decline over
a wide range of output
 Only a single large firm can achieve low
average total costs
 Protects the firm from competitors
 Natural monopoly
 the market demand curve cuts the longrun ATC curve where average total costs
are still declining
o Legal Restrictions
 Patent
 A legal barriers to entry that grants its
holder the exclusive right to sell a
product for 20 years from the date the
patent application is filed
 Innovation
o The process of turning an invention
into a marketable product
 Licenses
 Governments often confer monopoly
status by awarding a single firm the
exclusive right to supply a particular
good or service
o Control of Essential Resource
 Firms owns all sources of a resource
 ALCOA – aluminum
 DeBeers – diamonds
Created: M. Mari
Fall 2007
Page 2 of 7
ECO 2023
Chapter 10: Pure Monopoly
Monopoly Demand
 Three assumptions
o Patents, economies of scale or resource ownership
secure our monopolist’s status
o No unit of government regulates the firm
o Single price monopolist,
 Demand curve
o Downsloping demand curve
o Quantity demanded increases as price decreases
Implications of Demand Curve
 Marginal revenue is less than price
o The downward sloping demand curve means that
it can increase sales by charging a lower price
o Marginal revenue is less than price for every level
of output
o Marginal revenue curve is below the demand
curve
o Marginal revenue is positive while total revenue is
increasing.
o When total revenue is decreasing, marginal
revenue is negative
Price
Elastic
Unit Elastic
Inelastic
Demand = Average Revenue
Quantity
Marginal
Revenue
Created: M. Mari
Fall 2007
Page 3 of 7
ECO 2023
Chapter 10: Pure Monopoly
Where demand is price elastic, marginal
revenue is positive
Therefore:
TR
as
Price
Where demand is price inelastic, marginal
revenue is negative
TR
as
Price
Where demand is unit elastic, marginal revenue
is zero,
TR is at a maximum, neither increasing nor
decreasing
Price Maker
o When monopolist decides on output level, he
determines price.
Elastic Region
o Monopolist will never choose a price-quantity
combination where price reductions cause total
revenue to decrease
 Marginal revenue is NEGATIVE
Example:
Created: M. Mari
Fall 2007
Page 4 of 7
ECO 2023
Chapter 10: Pure Monopoly
Outp
ut
Price
Total
Revenue
Marginal
Revenue
Average
Total Cost
PXQ
MR
ATC
TC
$ 100.00
$ 190.00
$ 190.00
0
Average
Revenue
$
172.00
$
-
1
$
$
162.00
Q
Total Cost
$ 162.00
162.00
$
152.00
$
304.00
$
142.00
$
$ 135.00
426.00
$
132.00
$
$
$ 113.33
528.00
$
$ 100.00
$
122.00
$
610.00
6
$
112.00
$
672.00
$ 91.67
7
$
102.00
$
714.00
$ 91.43
8
$
92.00
$
736.00
$ 93.75
$
9
$
82.00
$
$
72.00
$
720.00
$
90.00
$
$ 97.78
Graphically:
Created: M. Mari
Fall 2007
Page 5 of 7
$
128.00
$
140.00
$
122.00
$
74.00
$
(14.00)
130.00
150.00
$1,030.00
The Firm’s Costs and Profit Maximization
 A firm that must find the profit maximizing price when
the demand curve for its output slopes downward.
 The monopolist produces the quantity at which total
revenue exceeds total cost by the greatest amount.
 Marginal revenue = marginal cost
Short Run Profits
86.00
$ (142.00)
$
$ 103.00
$
110.00
$ 880.00
$ (18.00)
10
80.00
$ 750.00
2.00
738.00
$
$
(34.00)
70.00
$ 640.00
$ 22.00
$
60.00
$ 550.00
$ 42.00
(28.00)
70.00
$ 470.00
$ 62.00
$
80.00
$ 400.00
$
$ 94.00
90.00
$ 340.00
$ 82.00
5
TR - TC
$ (100.00)
$ 270.00
$ 102.00
4
MC
$
$ 122.00
3
Profit or
Loss
$
$ 142.00
2
Marginal
Cost
$ (310.00)
ECO 2023
Chapter 10: Pure Monopoly
Price
Profit
Marginal
Cost
Average
Total Cost
P
Demand = Average Revenue
Q
Marginal
Revenue
Where MR = MC
Short Run Losses
o If the price covers average variable cost, the firm will
produce
o If not, the firm will shut down at least in the short run
Economic Effects of Monopoly
o Long run efficiency in pure competition is
P = MC = Minimum ATC
o Monopoly
MR < P, monopolist will sell smaller output at a
higher price than pure competition
An efficiency loss occurs because
 P > MC
 P > minimum ATC
Created: M. Mari
Fall 2007
Page 6 of 7
ECO 2023
Chapter 10: Pure Monopoly
Long-Run Profit Maximization
o If a monopoly is insulated from competition by high
barriers that block new entry, economic profit can
persist in the long run.
Price Discrimination
o Increasing profits by charging different groups of
consumers different prices when the price differences
are not justified by differences in production costs
o Conditions for Price Discrimination
o Demand must be downward sloping
o At least to separate groups of consumers, each
with a different price elasticity of demand
o The firm must be able to charge each group a
different price for essentially the same product.
o The firm must be able to prevent those who pay
the lower price from reselling the product to those
who pay the higher price.
o This firm maximizes profit by finding the price in each
market that equates marginal revenue with marginal
cost
Created: M. Mari
Fall 2007
Page 7 of 7