Professional Documents
Culture Documents
Monopoly
PRINCIPLES OF
ECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint Slides by Ron Cronovich
2007 Thomson South-Western, all rights reserved
Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect societys well-being?
CHAPTER 15
MONOPOLY
Introduction
A monopoly is a firm that is the sole seller of a
product without close substitutes.
CHAPTER 15
MONOPOLY
2. The govt gives a single firm the exclusive right to produce the good. E.g., patents, copyright laws
CHAPTER 15 MONOPOLY
3
Cost
Electricity
Economies of scale due to huge FC
1000
Q
4
but the demand curve for any individual firms product is horizontal at the market price.
The firm can increase Q without lowering P, so MR = P for the competitive firm.
CHAPTER 15 MONOPOLY
Q
5
Q
CHAPTER 15 MONOPOLY
6
1: A monopolys revenue
ACTIVE LEARNING Moonbucks is the only seller of cappuccinos in town.
Q
0 1 2 3 4 5
P
$4.50 4.00 3.50 3.00 2.50 2.00
TR
AR
n.a.
MR
The table shows the market demand for cappuccinos. Fill in the missing spaces of the table.
What is the relation between P and AR? Between P and MR?
1.50
7
ACTIVE LEARNING
Answers
Here, P = AR, same as for a competitive firm.
Here, MR < P, whereas MR = P for a competitive firm.
Q
0 1 2 3 4 5
1:
P
$4.50 4.00 3.50 3.00 2.50 2.00
TR
$0 4 7 9 10 10
AR
n.a. $4.00 3.50 3.00 2.50 2.00
MR
$4 3 2 1 0
1.50
1.50
8
MR
Q
9
MONOPOLY
Profit-Maximization
Like a competitive firm, a monopolist maximizes
profit by producing the quantity where MR = MC.
CHAPTER 15
MONOPOLY
11
Profit-Maximization
1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q.
Q
Costs and Revenue
MC
MR Quantity
Profit-maximizing output
CHAPTER 15 MONOPOLY
12
MC ATC
P
ATC
MR
Quantity
CHAPTER 15
MONOPOLY
13
MR Quantity
In the monopoly eqm, P > MR = MC The value to buyers of an additional unit (P)
exceeds the cost of the resources needed to produce that unit (MC). The monopoly Q is too low could increase total surplus with a larger Q. Thus, monopoly results in a deadweight loss.
CHAPTER 15
MONOPOLY
16
P P = MC MC
D
MR
QM QE
Quantity
CHAPTER 15
MONOPOLY
17
Examples:
Sherman Antitrust Act (1890), Clayton Act (1914) Antitrust laws ban certain anticompetitive practices, allow govt to break up monopolies.
Regulation
Govt agencies set the monopolists price For natural monopolies, MC < ATC at all Q,
so marginal cost pricing would result in losses. If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit.
MONOPOLY
18
CHAPTER 15
Public ownership
Doing nothing
CHAPTER 15
MONOPOLY
19
Price Discrimination
Discrimination is the practice of treating people
differently based on some characteristic, such as race or gender.
PM
Monopoly profit
MC
D MR
QM
CHAPTER 15 MONOPOLY
Quantity
21
Price
Monopoly profit
MC
D MR
Quantity
Q
22
CHAPTER 15
MONOPOLY
23
Need-based financial aid Low income families have lower WTP for their childrens college education. Schools price-discriminate by offering need-based aid to low income families.
CHAPTER 15
MONOPOLY
25
Example: A movie theater charges $4 for a small popcorn and $5 for a large one thats twice as big.
CHAPTER 15
MONOPOLY
26
In the real world, pure monopoly is rare. Yet, many firms have market power, due to selling a unique variety of a product having a large market share and few significant
competitors
CHAPTER 15
MONOPOLY
28
CHAPTER SUMMARY Monopoly firms (and others with market power) try
to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination.
CHAPTER 15
MONOPOLY
30