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r Monopoly r Producerǯs surplus

r Price Maker r Consumerǯs surplus
r Patent r Resource allocation
r Copyright r Anti trust law
r Trademark r Regulation
r Monopolistic r Price discrimination
r Entry barrier
r Natural Monopoly
r Welfare cost
r Total Surplus
While a competitive firm
is a price taker, a
monopoly firm is a price
maker.
rMS Windows
rMicrosoft has no close
competitors and, therefore, can
influence the market price of its
product.
’n 


, the buying
decisions of self-interested consumers
and the selling decisions of self-
interested producers are unwittingly
guided by an  to promote
general economic well-being.
By contrast, because
   firms are
unchecked by competition, the outcome
in a market with monopoly is often  
    .
©
  
 
r Single Producer.
r No substitutes.
r No free entry and exit .(Entry barrier)
r Their should be large number of buyers.
r No distinction between firm and industry .
r No supply curve .
r Why monopolies arise?
r A firm is a monopoly if it is the sole seller of its
product and if its product does not have close
substitutes.
The fundamental cause of monopoly is barriers
to entry
Entry barriers, in turn, have three main
sources:
1. A key resource is owned by a single firm.
2. The Government gives a single firm the
exclusive right to produce some good or
service.
3. The cost of production makes a single
producer more efficient than a large number
of producers.
¦eBEERS diamond monopoly
r Government created monopolies
KSEB, KWA, BSNL, ’ndian Railway
w
 

 




S Government has given a monopoly to a

company called Network Solutions, ’nc.,
which maintains the database of all .com,
.net, and .org internet addresses, on the
grounds that such data need to be
centralized and comprehensive.
Patents, Copyrights,
Trade Marks
w  
 
   by
allowing producers to charge higher
price and earn higher profits to
encourage some desirable behavior.
For example:
They allow pharmaceuticals
companies to be
   in
the drugs they discover  
    .
rNatural Monopolies
¦istribution of water, Bridge
Price charged by a monopoly
exceeds marginal cost.
 M



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r The monopolistǯs total revenue
equals the quantity sold times the
price.
r Average revenue is the amount of
revenue the firm receives per unit
sold
r   
   
r Monopolist marginal revenue is
always less than the price of its good.
To increase the amount sold,
a monopoly firm must lower
the price of its good
rMarginal revenue for monopolies
is different from marginal
revenue for competitive firms.
When a monopoly increases the amount it sells, it
has two effects on total revenue (P*Q)
a
 more output sold the Q is
higher

 The price falls, So P is lower
¦    
The 
  shows how the quantity
affects the price of the good.

The    how the firmǯs

revenue changes when the quantity
increases by 1 unit.

Because the price on all units sold must fall

if the monopoly increases production,
marginal revenue is always less than the
price. (after the first unit)
S

 


A Monopoly maximizes profit by
choosing the quantity at which
marginal revenue equals marginal
cost
MR = MC
’t then uses the demand curve to
find the price that will induce
consumers to buy that quantity.
 For a competitive
firm: P = MR =MC

For a monopoly firm:

P > MR = MC
’n competitive markets
price = marginal cost.


’n monopolized market
price > marginal cost




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rProfit = TR Ȃ TC
rProfit = (TR/Q Ȃ TC/Q) * Q
rProfit = (P Ȃ ATC )* Q
 
 

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1. Antitrust Laws
2. Regulation
3. Public Ownership
4. ¦oing Nothing
Mntitrust Laws
Government derives the power.

Mntitrust laws are collection of

statutes aimed at curbing
monopoly power.
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6egulation

rIn case of natural monopoly,

Government regulate the price

Public Ownership
rGovernment run KSEB, BSNL,
Water, Postal service, 6ailway
 Price discrimination J
r©irms try to sell the same good to
different customers for different
prices, even though the costs of
producing for two customers are the
same. This practice is called price
discrimination.
r The price discrimination is a rational strategy
for a profit maximizing monopolist.

r M price discriminating monopolist charges

each customer a price closer to his or her
willingness to pay than is possible with a
single price.

r Price discrimination can raise economic

welfare.
  




Price discrimination can possibly

occur only if it is not possible to
transfer any unit of the product from
one market to another.
’t shouldnǯt be possible for buyers in
the dearer market to transfer
themselves into the cheaper market
to buy the product or service at the
lower price
¦
S¦ 


r 1ǯst ¦egree: Maximum possible exploitation
r Perfect price discrimination
r KSEB: ¦omestic, Commercial, ’ndustrial
r 2ǯnd ¦egree: Separate price for different blocks
r Quantity discounts
r VeegaLand: ¦iscounts for schools, groups
r Railway: Season tickets
r 3ǯrd ¦egree: seller divide buyers into 2 or more sub
market. Most common.
r Paulo Coeloh: Alchemist
©
   


r Price discrimination of the first degree is said to
occur when the monopolist is able to sell each
separate unit of the output at a different price.

r Thus under the discrimination of Dzfirst degreedz

every buyer is forced to pay the price which is
equal to the maximum amount he is willing to pay
rather than do without the good altogether.

    



r ’n second degree, buyers are divided

into different groups and from each
group a different price is charged which
is the lowest demand price of that
group.
   1
  



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     

 
Goal of Firm Maximize Profit Maximize Profit

Rule for Maximizing MR = MC MR = MC

Can earn economic profit in the Yes Yes

short run

Can earn economic profits in No Yes

long run?
 


S





 ¦
     

 
Number of firms Many One
Marginal Revenue MR = P MR < P
Price P = MC P > MC
Produces welfare-maximizing level Yes No
of output
Entry in long run Yes No
Price discrimination possible? No Yes
Thank you