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    CH 8 Monopoly

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    shaheduzaman Shahed
    1. A monopoly is characterized by a single seller that produces a unique product without close substitutes and has high barriers to entry into the market such as legal protections, economies of scale, or exclusive ownership of necessary resources. 2. There are two types of monopolies: government-sanctioned monopolies that are legally protected, and market monopolies whose barriers arise from scale economies or exclusive access to resources. 3. A profit-maximizing monopolist will produce at the quantity where marginal revenue equals marginal cost and charge the highest price the market will bear at that quantity of output. This results in deadweight loss to society relative to a competitive market.

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    CH 8 Monopoly

    Uploaded by

    shaheduzaman Shahed
    15 views14 pages
    1. A monopoly is characterized by a single seller that produces a unique product without close substitutes and has high barriers to entry into the market such as legal protections, economies of scale, or exclusive ownership of necessary resources. 2. There are two types of monopolies: government-sanctioned monopolies that are legally protected, and market monopolies whose barriers arise from scale economies or exclusive access to resources. 3. A profit-maximizing monopolist will produce at the quantity where marginal revenue equals marginal cost and charge the highest price the market will bear at that quantity of output. This results in deadweight loss to society relative to a competitive market.

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    Ch 8 Monopoly

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    1. A monopoly is characterized by a single seller that produces a unique product without close substitutes and has high barriers to entry into the market such as legal protections, economies of scale, or exclusive ownership of necessary resources. 2. There are two types of monopolies: government-sanctioned monopolies that are legally protected, and market monopolies whose barriers arise from scale economies or exclusive access to resources. 3. A profit-maximizing monopolist will produce at the quantity where marginal revenue equals marginal cost and charge the highest price the market will bear at that quantity of output. This results in deadweight loss to society relative to a competitive market.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    15 views14 pages

    CH 8 Monopoly

    Uploaded by

    shaheduzaman Shahed
    1. A monopoly is characterized by a single seller that produces a unique product without close substitutes and has high barriers to entry into the market such as legal protections, economies of scale, or exclusive ownership of necessary resources. 2. There are two types of monopolies: government-sanctioned monopolies that are legally protected, and market monopolies whose barriers arise from scale economies or exclusive access to resources. 3. A profit-maximizing monopolist will produce at the quantity where marginal revenue equals marginal cost and charge the highest price the market will bear at that quantity of output. This results in deadweight loss to society relative to a competitive market.

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    of 14

    MONOPOLY

    Chapter 21
    THE THEORY OF MONOPOLY
    The theory is based on three assumptions:

    1. There is one seller.


    2. The single seller sells a product for which there
    is no close substitute
    3. There are extremely high barriers to entry
    BARRIERS TO ENTRY: A KEY TO
    UNDERSTANDING MONOPOLY
     Legal Barriers: Three types:
    1. Public Franchise is a right granted to a firm by
    government that permits the firm to provide a
    particular good or service and excludes all others
    from doing the same.
    2. Patents
    3. Licenses

     Economies of Scale: In some industries, low


    average total costs are only obtained through large
    scale production. If only one firm can survive in that
    industry, the firm is called a Natural Monopoly.
     Exclusive Ownership of a Necessary Resource:
    Existing firms may be protected from entry of new
    firms by the exclusive or near-exclusive ownership of
    a resource needed to enter the industry
    WHAT IS THE DIFFERENCE BETWEEN A
    GOVERNMENT MONOPOLY AND A MARKET
    MONOPOLY?
     Some economists use the term government
    monopoly to refer to monopolies that are legally
    protected from competition through Patents,
    Licenses, Public Franchises ➔ Legally
    Prohibited.

     The term market monopoly to refer to monopolies


    that are not legally protected from competition.
    The barriers take form of Economies of Scale and
    Exclusive ownership of resource.
    MONOPOLY PRICING AND OUTPUT
    DECISION
     A monopolist is a PRICE SEARCHER.

     Price Searcher: A seller that has the ability to


    control to some degree the price of the product it
    sells.

    ➔ Unlike the a Perfectly Competitive firm, it can


    raise price or lower prices and still sell the
    product.
    ➔ This ability is determined by the demand curve
    it faces ➔ which is also the market/industry
    demand curve ➔ DOWNWARD SLOPING
    DEMAND CURVE
    THE MONOPOLIST’S DEMAND AND MARGINAL
    REVENUE CURVES ARE NOT SAME
     In Perfect Competition: P = MR
     In Monopoly: P > MR

     Price is determined by Demand. So Demand Curve


    lies ABOVE MR curve.
     For first unit, P = MR, for second unit onwards, P >
    MR

     Therefore: In monopoly, the firm’s demand curve is


    not the same as its marginal revenue curve. The
    monopolist’s demand curve lies above its marginal
    revenue curve
    THE MONOPOLIST’S DEMAND AND MARGINAL
    REVENUE CURVES ARE NOT SAME
    PRICE AND OUTPUT FOR A PROFIT-
    MAXIMIZING MONOPOLIST
     Profit Maximizing Condition: MR = MC
     The monopolist that seeks to maximize profits
    produces the quantity of output at which
    MR=MC and charges the highest price per unit
    at which this quantity of output can be sold.
     A monopolists can also make profits and loses,
    after taking into consideration Average Total
    Costs.
     A monopolist can incur a loss if the highest
    possible price charged at MR = MC is less than
    the ATC at that point
    THE MONOPOLIST’S PROFIT-MAXIMIZING PRICE AND
    QUANTITY OF OUTPUT

    The monopolist
    produces the quantity
    of output (Q1) at
    which MR=MC, and
    charges the highest
    price per unit at
    which the quantity of
    output can be sold
    (P1). Notice that at
    the profit maximizing
    quantity of output,
    price is greater than
    marginal cost, P>MC.
    PERFECT COMPETITION AND MONOPOLY
     For the perfectly competitive firm, P=MR; for the
    monopolist, P>MR. The perfectly competitive
    firm’s demand curve is its marginal revenue
    curve; the monopolist’s demand curve lies above
    its marginal revenue curve

     The perfectly competitive firm charges a price


    equal to marginal cost; the monopolist charges a
    price greater than marginal cost.

     A monopoly firm differs from a perfectly


    competitive firm in terms of how much
    consumers’ surplus buyers receive.
    MONOPOLY, PERFECT COMPETITION, AND
    CONSUMERS’ SURPLUS

    Would you,
    as a
    consumer
    prefer a
    monopoly or
    a
    perfectively
    competitive
    market?
    THE CASE AGAINST MONOPOLY:
    DEADWEIGHT LOSS
     The Deadweight Loss of Monopoly: Greater
    output is produced under perfect competition
    than under monopoly. The net value of the
    difference in these two output levels is said to be
    the deadweight loss of monopoly.
     The difference in output results in a welfare loss
    to the society.
    THE CASE AGAINST MONOPOLY:
    1. DEADWEIGHT LOSS
    The monopolist produces
    QM, and the perfectly
    competitive firm
    produces the higher
    output level QPC

    The monopolist also


    charges a higher price
    than perfectly
    competitive firms.
    THE CASE AGAINST MONOPOLY:
    2. Rent seeking behavior

    3. X-inefficiency

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