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Chapter 11: Monopoly

Chapter 11: Monopoly. Monopoly. Assumptions: Restricted entry One firm produces a distinct product Implications: A monopolist firm is a ‘price setter,’ that is, they can affect the market price and set it to maximize their profits ( demand curve slopes downward )

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Chapter 11: Monopoly

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  1. Chapter 11: Monopoly

  2. Monopoly Assumptions: • Restricted entry • One firm produces a distinct product Implications: • A monopolist firm is a ‘price setter,’ that is, they can affect the market price and set it to maximize their profits (demand curve slopes downward) • Profit maximizing output occurs where MC=MR (like perfect competition), but price is above MC • Economic profits are positive in the long run • A monopolist sets price and quantity simultaneously and therefore does not have a true supply curve • The monopolist’s profit-maximizing output will not be socially optimal

  3. Sources of Monopoly • Various sources of barriers to entry, such as: • Exclusive control over natural resources • Economies of scale • Natural monopoly has a constantly downward sloping LRATC curve • Patents/trademarks • Network economies • Government licenses or franchises • Product differentiation

  4. Monopoly: Numeric Example

  5. Monopoly Price/Marginal Revenue Marginal cost Inefficiency or deadweight loss P* Average total cost profits demand widgets Q* Marginal revenue

  6. Algebra of Marginal Revenueand Elasticity • Marginal Revenue • Recall: Price Elasticity of Demand • Therefore,

  7. Monopolist Profit-Maximizing Markup

  8. Algebra of Monopoly Optimums • A monopolist faces the following demand and marginal cost curves • What is the profit-maximizing price it will charge? What is the total profit? What is the size of the inefficiency?

  9. Two-Plant Monopoly Market 1 Market 2 Total MC P2 P1 MC* MR1 + MR2 Q1 + Q2 Q1 Q2

  10. Total Revenue: Monopoly v. Perfect Competitor Total Revenue Total Revenue TR = P*Q Slope = P* Q Q Perfect Competitor Single-Price Monopoly

  11. Monopoly Price setter MR is declining and below demand curve Equilibrium price is set above MC Economically inefficient Perfect Competitor Price taker MR is constant Marginal cost pricer Economically efficient Monopoly v. Perfect Competitor

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