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    Chap 15

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    Harshad Italiya
    A firm is considered a monopoly if.. It is the sole seller of its product. Barriers to entry have three sources: ownership of a key resource. Patents, copyrights and government licensing. Costs of production make a single producer more efficient than a large number of producers.

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    Attribution Non-Commercial (BY-NC)
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    Chap 15

    Uploaded by

    Harshad Italiya
    23 views23 pages
    A firm is considered a monopoly if.. It is the sole seller of its product. Barriers to entry have three sources: ownership of a key resource. Patents, copyrights and government licensing. Costs of production make a single producer more efficient than a large number of producers.

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    A firm is considered a monopoly if.. It is the sole seller of its product. Barriers to entry have three sources: ownership of a key resource. Patents, copyrights and government licensing. Costs of production make a single producer more efficient than a large number of producers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    23 views23 pages

    Chap 15

    Uploaded by

    Harshad Italiya
    A firm is considered a monopoly if.. It is the sole seller of its product. Barriers to entry have three sources: ownership of a key resource. Patents, copyrights and government licensing. Costs of production make a single producer more efficient than a large number of producers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    MONOPOLY

    Chapter 15

    MONOPOLY While a competitive firm is a price taker, a monopoly firm is a price maker.

    MONOPOLY
    A firm

    is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes.

    WHY MONOPOLIES ARISE

    The fundamental cause of monopoly is barriers to entry.

    WHY MONOPOLIES ARISE


    Barriers to entry have three sources:

    Ownership of a key resource.

    This tends to be rare. De Beers is an example

    The government gives a single firm the exclusive right to produce some good.

    Patents, Copyrights and Government Licensing.

    Costs of production make a single producer more efficient than a large number of producers.

    Natural Monopolies

    ECONOMIES OF SCALE AS A CAUSE OF MONOPOLY...


    Cost

    Average total cost

    Quantity of Output

    MONOPOLY VERSUS COMPETITION


    Monopoly Is the sole producer Has a downwardsloping demand curve Is a price maker Reduces price to increase sales
    Competitive Firm Is one of many producers Has a horizontal demand curve Is a price taker Sells as much or as little at same price

    DEMAND CURVES FOR COMPETITIVE AND MONOPOLY FIRMS...


    (a) A Competitive Firms Demand Curve Price (b) A Monopolists Demand Curve

    Price

    Demand

    Demand
    0 Quantity of Output 0 Quantity of Output

    A MONOPOLYS REVENUE
    Total

    Revenue

    P x Q = TR
    Average

    Revenue
    Revenue

    TR/Q = AR = P
    Marginal

    DTR/DQ = MR

    A MONOPOLYS MARGINAL REVENUE

    A monopolists marginal revenue is always less than the price of its good.
    The

    demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.

    A MONOPOLYS TOTAL, AVERAGE, AND MARGINAL REVENUE


    Quantity (Q) 0 1 2 3 4 5 6 7 8 Price (P) $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 Total Revenue (TR=PxQ) $0.00 $10.00 $18.00 $24.00 $28.00 $30.00 $30.00 $28.00 $24.00 Average Revenue (AR=TR/Q) $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 Marginal Revenue (MR= DTR / DQ ) $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 -$2.00 -$4.00

    A MONOPOLYS MARGINAL REVENUE

    When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q).
    The

    output effectmore output is sold, so Q is higher. The price effectprice falls, so P is lower.

    Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

    DEMAND AND MARGINAL REVENUE CURVES FOR A MONOPOLY...


    Price $11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4

    Marginal revenue
    1 2 3 4 5 6 7 8

    Demand (average revenue)


    Quantity of Water

    Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

    PROFIT-MAXIMIZATION FOR A MONOPOLY...


    Costs and Revenue 2. ...and then the demand curve shows the price consistent with this quantity. B 1. The intersection of the marginal-revenue curve and the marginalcost curve determines the profit-maximizing quantity... Average total cost A Demand

    Monopoly price

    Marginal cost

    Marginal revenue 0

    QMAX

    Quantity

    COMPARING MONOPOLY AND COMPETITION

    For a competitive firm, price equals marginal cost.

    P = MR = MC

    For a monopoly firm, price exceeds marginal cost.

    P > MR = MC

    A MONOPOLYS PROFIT

    Profit equals total revenue minus total costs.

    Profit = TR - TC Profit = (TR/Q - TC/Q) x Q Profit = (P - ATC) x Q

    Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

    THE MONOPOLISTS PROFIT...


    Costs and Revenue Marginal cost Monopoly E price B

    Average total cost

    Average total cost D

    C Demand

    Marginal revenue 0

    QMAX

    Quantity

    THE MONOPOLISTS PROFIT

    The monopolist will receive economic profits as long as price is greater than average total cost.

    PUBLIC POLICY TOWARD MONOPOLIES


    Government responds to the problem of monopoly in one of four ways.

    Making monopolized industries more competitive. Regulating the behavior of monopolies. Turning some private monopolies into public enterprises. Doing nothing at all.

    TWO IMPORTANT ANTITRUST LAWS

    Sherman Antitrust Act (1890)


    Reduced

    the market power of the large and powerful trusts of that time period. the governments powers and authorized private lawsuits.

    Clayton Act (1914)


    Strengthened

    MARGINAL-COST PRICING FOR A NATURAL MONOPOLY...


    Price

    Average total cost Regulated price

    Loss

    Average total cost Marginal cost

    Demand

    Quantity

    PRICE DISCRIMINATION

    Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same. In order to do this, the firm must have market power.

    PRICE DISCRIMINATION

    Two important effects of price discrimination:


    It can increase the monopolists profits. It can reduce deadweight loss.

    But in order to price discriminate, the firm must


    Be able to separate the customers on the basis of willingness to pay. Prevent the customers from reselling the product.

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