AP Econ
Mr. Cullivan
Name:________________________
Date:_________________________
Unit 4: Imperfect Competition--Monopolies
Four Market Structures
_________ Competition
_____________
Competition
What do you already know about monopolies?
True or False?
1.
2.
3.
4.
Pure
______________
___________
5.
6.
Monopoly
Characteristics of Monopolies
1.
Single Seller
• __________ firm controls the vast majority of a market
• The Firm ________ the Industry
2. ____________ good with no close substitutes
3. “Price _______________”
The firm can manipulate the price by changing the _______________ it produces (ie. shifting the supply
curve to the left).
4. High ___________ to entry
 New firms cannot __________ market
 No immediate _________________
 Firm can make ___________ in the long-run
5. Some “_____________” Competition
 Despite having no close competitors, monopolies still _______________ their products in an effort to
increase demand.
Four Origins of Monopolies
1. _______________ is the barrier to entry
Examples: Nowhere ______ stations, De Beers Diamonds, Columbus Crew…
-_____________ or control of resources limits competition and leads to one supplier.
2. The ______________ is the barrier to entry
Examples: ________ Company, Firefighters, the army, Pharmaceutical drugs, _____ cubes…
-Government allows monopoly for public ___________ or to stimulate innovation.
-The government issues ___________ to protect inventors and forbids others from using their invention.
(They last 20 years)
3. ____________ or common use is the barrier to entry
Ex: Microsoft, Intel, _____________, band aide…
-Patents and widespread availability of certain products lead to only one major firm controlling a market.
4. Mass Production and Low __________ are barriers to entry
Ex: Electric Companies (AEP)
• If there were three competing electric companies they would have __________ costs.
• Having only one company keeps prices ______
-Economies of ___________ make it impractical to have smaller firms.
___________ Monopoly- It is natural for only one firm to produce because they can produce at the lowest cost.
Drawing Monopolies--Good news…
1. Only one graph because the firm ______ the industry.
2. The cost curves are the _______
3. The ______=______ rule still applies
4. Shut down rule still applies
The Big Differences
• Monopolies (and all Imperfectly competitive firms) have ___________ sloping demand curve.
• Which means, to sell more a firm must lower its _____________.
• This changes MR…
The marginal revenue doesn’t equal the ____________!
Combine the Demand of an industry with the costs of a firm.
Why is MR less than Demand?
P
11
Qd
0
TR
0
MR
-
Why is MR less than Demand?
MR is less than _________________ (demand)
Calculating Marginal Revenue
Calculate TR and Marginal Revenue
Quantity
Price
0
$16
1
$15
2
$14
3
$13
4
$12
5
$11
6
$10
7
$9
8
$8
9
$7
10
$6
TR
MR
Maximizing Profit
How much is the TR, TC and Profit or Loss?
NOTE: A monopolists produces where MR=MC, but charg
but charges the price consumer are willing to pay identified
identified by the _______________ curve.
T
T
P
Total Revenue Test
If price falls and TR falls then
demand is _______________.
1 2 3 4 5 6 7 8 9 10 11 12 13
Total Revenue is at it’s peak when MR hits zero
14
15 16 17 18 Q
What if Costs are Higher?
TR:
TC:
Profit/Loss:
Monopoly Practice
You open a pizza store in a brand new town called Nowhere, located in the hills of Nebraska. You make pizza like no other. Your
product is inches thick, dripping with cheese, and bursting with flavor from secret ingredients that Colonel Sanders would have given
his right wing for. Your exclusive human capital—talents and secrets—give you a monopoly on the gourmet pizza business in your
area and you face the entire market demand for gourmet pizza as illustrated in the graph below.
1. What price could you sell the pizza for if you were trying to keep
prices low and just meet the total costs (AC)?
2. What price would your profit-maximizing monopolist business
charge for the good? Why?
3. What quantity of the good would your profit-maximizing
monopolist business sell this product at? Why?
Total Revenue: ________
Total Profit:___________
Calculate Practice 2:
TR:
TC:
Profit/Loss:
Profit/Loss per Unit:
Total Cost:__________
Profit per pizza:______