Professional Documents
Culture Documents
Monopoly Resources
Government-Created Monopolies
Natural Monopolies
Average
total
cost
0
Quantity of Output
2007 Thomson South-Western
Price
Monopoly
Demand
Competitive Firm
Demand
Quantity of Output
Quantity of Output
A Monopolys Revenue
Table 1 A Monopolys Total, Average, and Marginal Revenue
Total Revenue
P Q = TR
Average Revenue
TR/Q = AR = P
Marginal Revenue
TR/ Q = MR
A Monopolys Revenue
A Monopolys Revenue
Demand
(average
revenue)
Marginal
revenue
2
Profit Maximization
A monopoly maximizes profit by producing the
quantity at which marginal revenue equals
marginal cost.
It then uses the demand curve to find the price
that will induce consumers to buy that quantity.
Quantity of Water
Profit Maximization
Monopoly
price
Demand
Marginal
cost
Marginal revenue
0
QMAX
Quantity
2007 Thomson South-Western
2007 Thomson South-Western
A Monopolys Profit
Costs and
Revenue
Marginal cost
Monopoly E
price
Monopoly
profit
Average
total D
cost
C
Demand
Marginal revenue
0
QMAX
Quantity
2007 Thomson South-Western
A Monopolists Profit
Costs and
Revenue
Price
during
patent life
Price after
patent
expires
Marginal
cost
Demand
Marginal
revenue
0
Monopoly
quantity
Competitive
quantity
Quantity
2007 Thomson South-Western
Price
Marginal cost
Value
to
buyers
Cost
to
monopolist
Value
to
buyers
Cost
to
monopolist
Demand
(value to buyers)
Quantity
0
Value to buyers
is greater than
cost to seller.
Efficient
quantity
Value to buyers
is less than
cost to seller.
Deadweight
loss
Marginal cost
Monopoly
price
Monopoly Efficient
quantity quantity
Demand
Quantity
2007 Thomson South-Western
Regulation
Government may regulate the prices that the
monopoly charges.
Average total
cost
Loss
Regulated
price
Regulation
In practice, regulators will allow monopolists to
keep some of the benefits from lower costs in
the form of higher profit, a practice that
requires some departure from marginal-cost
pricing.
Marginal cost
Demand
0
Quantity
2007 Thomson South-Western
2007 Thomson South-Western
Public Ownership
Doing Nothing
PRICE DISCRIMINATION
Price discrimination is the business 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.
Consumer
surplus
Deadweight
loss
Monopoly
price
Profit
Marginal cost
Marginal
revenue
Quantity sold
Demand
Quantity
2007 Thomson South-Western
10
Movie tickets
Airline prices
Discount coupons
Financial aid
Quantity discounts
Demand
Marginal revenue
Quantity sold
Quantity
2007 Thomson South-Western
2007 Thomson South-Western
11
Summary
Summary
Summary
Summary
12
Summary
Monopolists can raise their profits by charging
different prices to different buyers based on
their willingness to pay.
Price discrimination can raise economic
welfare and lessen deadweight losses.
13