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Chapter 11 - PowerPoint PPT Presentation

Chapter 11. Monopoly. The price of monopoly is upon every occasion the highest which can be got. ADAM SMITH. Monopoly Defined. Pure monopoly Industry One supplier Product – no close substitutes Sources of monopoly Barriers to entry Cost advantages. Monopoly Defined.

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Presentation Transcript

Chapter 11

Monopoly

The price of monopoly is upon every occasion the highest which can be got.

• Pure monopoly

• Industry

• One supplier

• Product – no close substitutes

• Sources of monopoly

• Barriers to entry

• Barriers to entry & cost advantages

• Legal restrictions

• Patents

• Control of a scarce resource or input

• Deliberately erected entry barriers

• Large sunk costs

• Technical superiority

• Economies of scale

• Natural monopoly

• One firm

• Large-scale production

• Produce all output

• Lower average cost

Natural monopoly

\$3.00

2.50

2.00

Average Cost

AC

C

B

A

1

2

2.5

Quantity Supplied

• Monopolist

• Select price OR quantity

• Downward-sloping demand curve

• P = AR

• Marginal revenue curve

• Below demand curve

• MR < AR

Profit-maximizing equilibrium for a monopolist

D

M

P

C

\$9

4

7

Price per Unit

D (AR)

MR

MC

AC

MC

AC

0

150

Quantity

• Profit-maximizing monopolist

• Output: MR = MC

• Price: Demand curve

• If P > AC: Profit

• If P < AC: Loss

• Profit = TR – TC

A profit-maximizing monopolist’s price-output decision

• Monopoly vs. Perfect competition

• Monopolist

• Profits can persist

• Restrict output to raise price

• Short-run

• Long-run

• Inefficient resource allocation

• Monopoly

• Likely to shift demand

• Likely to shift cost curves

Comparison of a monopoly and a perfectly competitive industry

D

P

M

B

C

\$9

7

Price per Unit

D (AR)

MR

MC

AC

MC

AC

300

0

150

Quantity

• May aid innovation

• Natural monopolies

• Lower costs

• Economies of scale

• Price discrimination

• Sell same product

• Different prices

• Different customers

• No differences in cost

• Differences in cost

• Supply different customers

• Charged same price

• Price discrimination

• Higher profits

• Two consumer groups

• Different demand curves

• Different MR curves

• Different prices

• Same marginal revenue: MRa = MRb

• Maximize profits

• MC = MRa = MRb

Prices and quantities under price discrimination

Customer group B

Customer group A

Da

Db

Pa

Pb

J

W

Price

Price

H

H

MRb

MRa

Qa

Qb

Db

Da

0

0

Quantity

Quantity

(b)

(a)

• Price discrimination

• Desirable sometimes

• Post office

• Discounts (senior, student)

• Firms – reach economies of scale