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AP Economics. Mr. Bernstein Module 61: Introduction to Monopoly November 25, 2013. AP Economics Mr. Bernstein. Monopoly vs. Perfect Competition Monopolist maximizes profit where MR=MC Perfectly Competitive firm also maximizes profit where MR=MC Monopolist sets price

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### AP Economics

Mr. Bernstein

Module 61:

Introduction to Monopoly

November 25, 2013

AP EconomicsMr. Bernstein

Monopoly vs. Perfect Competition

• Monopolist maximizes profit where MR=MC
• Perfectly Competitive firm also maximizes profit where MR=MC
• Monopolist sets price
• Perfectly Competitive firm is a price taker
• Monopolist has barriers to entry
• Perfectly Competitive firms have free entry and exit
• Monopolist has opportunity to earn profits in long run
• Perfectly Competitive firm will earn zero profit in long run
AP EconomicsMr. Bernstein

Monopoly Demand and MR

• Monopolist MR

curve is below D

curve because

they must reduce

price to sell more

• Unlike perfect

competition,

DFIRM = DINDUSTRY

AP EconomicsMr. Bernstein

Monopoly Profit-Maximizing P and Q

• As with perfect

competition, p is

maximized where

MR=MC

• Optimal Output

Rule – Know the

Concept, own the

Concept!

\$

Profit = \$12

Pm= \$14

MC = ATC

Pc = \$10

D

MR

Qm= 3

Output

AP EconomicsMr. Bernstein

Monopoly Profit-Maximizing P and Q

• Monopolies create

inefficiencies; P>MC

• Also notice Qm is

lower than Qc would

be (where D and MC

Intersect)

\$

Profit = \$12

Pm= \$14

MC = ATC

Pc = \$10

D

MR

Qm= 3

Output

AP EconomicsMr. Bernstein

Monopoly Profit-Maximizing P and Q

• With barriers to entry

there are no new

entrants and no

equilibrium with zero

economic profits at

long-run equilibrium

AP EconomicsMr. Bernstein

Classic Monopoly Graph

• Qm is found where

MR=MC

• But Pm is found by

extending Qm

vertically to D curve

• Be sure you can

find Monopolist’s

p area