Monopoly

Monopoly

Average and marginal revenue under monopoly

Revenues for a firm facing a downward-sloping demand curve

Q (units) 1 2 3 4 5 6 7 P = AR () 8 7 6 5 4 3 2 TR () 8 6 14 4 18 2 20 0 20 2 18 4 14 MR ()

Revenues for a firm facing a downward-sloping demand curve

Q (units) 1 2 3 4 5 6 7 P = AR () 8 7 6 5 4 3 2 TR () 8 6 14 4 18 2 20 0 20 2 18 4 14 MR ()

Revenues for a firm facing a downward-sloping demand curve

Q (units) 1 2 3 4 5 6 7 P = AR () 8 7 6 5 4 3 2 TR () 8 6 14 4 18 2 20 0 20 2 18 4 14 MR ()

AR and MR curves for a firm facing a downward-sloping D curve

8
Q P =AR (units) () 8 1 7 2 6 3 5 4 4 5 3 6 2 7

AR, MR ()

AR

0 1 -2 2 3 4 5 6 7

Quantity

-4

AR and MR curves for a firm facing a downward-sloping D curve

8
Q P =AR (units) () 8 1 7 2 6 3 5 4 4 5 3 6 2 7 TR MR () () 8 6 14 4 18 2 20 0 20 -2 18 -4 14

AR, MR ()

AR

0 1 -2 2 3 4 5 6 7

Quantity

-4

MR

AR and MR curves for a firm facing a downward-sloping D curve

8

Elastic
6

Elasticity = -1

AR, MR ()

Inelastic

AR

0 1 -2 2 3 4 5 6 7

Quantity

-4

MR

Monopoly

Profit-maximising price and output:

using total cost and revenue curves

Finding maximum profit using total curves

24 20

TR, TC, TP ()

16 12 8 4 0 1 -4 -8 2 3 4 5 6 7

Quantity

Finding maximum profit using total curves

24 20

TR, TC, TP ()

16 12 8 4 0 1 -4 -8 2 3 4 5 6 7

TR

Quantity

Finding maximum profit using total curves

24 20

TC

TR, TC, TP ()

16 12 8 4 0 1 -4 -8 2 3 4 5 6 7

TR

Quantity

Finding maximum profit using total curves

24 20

TC

TR, TC, TP ()

16 12 8 4 0 1 -4 -8 2 3 4 5 6 7

TR

Quantity

TP

Finding maximum profit using total curves

24

TC
b

20

TR, TC, TP ()

16 12 8 4 0 1 -4 -8

TR

c
2 3 4

d
5 6 7

Quantity

TP

Finding maximum profit using total curves

24 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8

TC
d

TR, TC, TP ()

TR

Quantity

TP

Monopoly

Profit-maximising price and output:

using marginal and average cost and revenue curves

Finding the profit-maximising output using marginal curves

16

12

Costs and revenue ()

0 1 -4 2 3 4 5 6 7

Quantity

Finding the profit-maximising output using marginal curves 16 MC

12

Costs and revenue ()

0 1 -4 2 3 4 5 6 7

Quantity

Finding the profit-maximising output using marginal curves 16 MC

12

Costs and revenue ()

Profit-maximising output

0 1 -4 2 3 4 5 6 7

Quantity

MR

Measuring the maximum profit using average curves

16

MC

12

Costs and revenue ()

0 1 -4 2 3 4 5 6 7

Quantity

MR

Measuring the maximum profit using average curves

16

MC

12

Costs and revenue ()

AR
0 1 -4 2 3 4 5 6 7

Quantity

MR

Measuring the maximum profit using average curves

16

MC
Total profit = 1.50 x 3 = 4.50

12

Costs and revenue ()

AC
a

6.00 TOTAL PROFIT b 4.50

4

AR
0 1 -4 2 3 4 5 6 7

Quantity

MR

Monopoly

A natural monopoly

Natural Monopoly

LRAC

D2
O

D1
Q

Monopoly

Comparison of monopoly with perfect competition (a) same industry MC curve

Equilibrium of industry under perfect competition and monopoly: with the same MC curve

MC Monopoly

P1

AR = D

MR
O
Q1

Equilibrium of industry under perfect competition and monopoly: with the same MC curve

MC ( = supply under
perfect competition)

P1 P2

Comparison with Perfect competition

AR = D

MR
O
Q1 Q2

Monopoly

Comparison of monopoly with perfect competition (b) monopoly has lower AC curve

Equilibrium of industry under perfect competition and monopoly: with different MC curves

MCmonopoly

P1

AR = D
MR
O Q1 Q

Equilibrium of industry under perfect competition and monopoly: with different MC curves

MC ( = supply)perfect competition

MCmonopoly
P2 P1 P3

AR = D
MR
O Q2 Q1 Q3 Q

Monopoly

Deadweight welfare loss under monopoly

A monopolist producing less than the social optimum

MC

P1

MC1

AR MR
O Q1

Monopoly output

A monopolist producing less than the social optimum

MC = MSC

P1 P2 = MSB
= MSC

MC1

AR = MSB MR
O Q1 Q2

Q
Perfectly competitive output

Monopoly output

Deadweight loss under monopoly

MC
(= S under perfect competition)

Consumer surplus

Ppc

a
Producer surplus

AR = D

Qpc Q (a) Industry equilibrium under perfect competition

Deadweight loss under monopoly

MC
(= S under perfect competition)

Pm Ppc

Consumer surplus

Deadweight welfare loss

b a

Producer surplus

MR
O Qpc

AR = D
Qpc

(b) Industry equilibrium under monopoly

Deadweight loss under monopoly

Perfect competition

MC
(= S under perfect competition)

Consumer surplus

Ppc

a
Producer surplus

AR = D

Qpc Q (a) Industry equilibrium under perfect competition

Deadweight loss under monopoly

MC

Monopoly

(= S under perfect competition)

Pm Ppc

Consumer surplus

Deadweight welfare loss

b a

Producer surplus

MR
O Qpc

AR = D
Qpc

(b) Industry equilibrium under monopoly