ECONOMICS 200
PRINCIPLES OF MICROECONOMICS
Professor Lucia F. Dunn
Department of Economics
1
Monopoly
• A single seller in a market  Rare
Monopolist Demand Curve
p
D
0
Q
2
Monopoly
Monopolist diagram
p
MR
0
D = AR = P
Q
Marginal revenue lies below demand for the monopolist.
3
Monopoly
Example:
QD
P
TR
MR
0
$172
0
--
1
162
162
162
2
152
304
142
3
142
426
122
4
132
528
102
5
122
610
82
6
112
672
62
7
102
714
42
8
92
736
22
9
82
738
2
10
72
720
-18
4
Monopoly
Monopolist  - Maximizing Diagram
P
MC
ATC
C
P0
A
B
D
MR
0
Q0
Q
5
Monopoly
Monopolist  - Maximization
P
MC
NOTE: Always set price from the
demand curve.
ATC
P0
A
 = TR – TC
C
= OPoCQo – OABQo
B
= APoCB
D
M
R
0
Q0
 will last to long run because
Q
there is no entry by competitors.
6
Monopoly
Monopolist Could Also Make A Loss
ATC
P
MC
A
P0
 = TR – TC
C
= OPoBQo – OACQo
B
= PoACB(shaded area)
 A LOSS
D
MR
0
Q0
Q
7
Special Case of Monopoly
Discriminating Monopoly or Price Discrimination
charging different prices to different
customers for the same commodity.
Necessary Condition:
(1) Must have some monopoly power
(2) Must face at least two different demands
(3) Must be able to keep the two demand
separate.
8
Reminder
Consumer Surplus is measured as the area
above the price line and under the demand
curve.
P
Consumer
Surplus
PO
D
QO
Q
9
Special Case of Monopoly
Discriminating Monopoly or Price Discrimination
p
Result:
Take away some consumer
surplus.
p1
p0
A
B
D
Consumer
surplus
is
difference between what a
consumer actually pays for
a commodity and what
she/he would be willing to
pay:
Q1
Q0
Q
Q1 sells at P1 ; Q0 – Q1 sells at P0 .
P0P1AB is no longer consumer surplus,
but rather is now part of total revenue
10
for firm.
Special Case of Monopoly
Perfect Price Discrimination
Price will follow the Demand Curve.
OUTCOME:
Completely Eliminate Consumer Surplus.
11
Special Case of Monopoly
Market Structure Spectrum
Degree of Competition
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Concentration Ratio is a measure of market power:
is the the fraction of total market sales
controlled by the industry’s largest firms.
— 4 - firm concentration ratio
— 8 - firm concentration ratio
12
Monopolistic Competition
Characteristics:
1. Lots of firms
2. Free entry and exit
3. Product differentiation
p
D
0
Q
13
Monopolistic Competition
The steepness of demand depends on the number
of close substitutes.
p
D
p
p
P2
P1
P2
D
P1
D
Q
0
Perfect Competition
0
Q2
Q1 Q
Monopolistic Competition
0
Q
Q2 Q1
Monopoly
14
Monopolistic Competition
Profit-Maximizing in Monopolistic
Competition in Short Run
P
MC
SRATC
A
P
C
B
D
MR
0
Q
Q
 = CPAB
15
Monopolistic Competition
Profit-Maximizing in Monopolistic
Competition in Long Run
P
MC
LRATC
A
P
MR
0
D
Q
Q
 = TR – TC = OPAQ – OPAQ = 0
16
Oligopoly
Term is Greek for “few sellers”
— Is a type of industry where a few large firms
account for the majority of sales.
— Their products are usually differentiated, but
there are close substitutes.
— Most of the big brand name items that you
are aware of are produced under oligopolistic
conditions.
— There can be small sellers in these markets
also, but the very large ones account for the
vast majority of sales.
17
Oligopoly
Continued
—These firms are not price-takers, they are
price-setters.
—They know that their competitions will react
to what they do. So there is strategic behavior.
—Collusion is illegal, but frequently there is
“tacit collusion”.
18
Oligopoly
Profit-Maximizing Diagram for Oligopoly
P
MC
ATC
B
P0
A
C
D
MR
0
Q0
 = CP0AB
P > MC
Q
These profit can persist
to the long-run because
of barriers to entry.
19
Barriers to Entry
1. Cost Advantage
2. Predatory Pricing
3. Advertising - Creating Brand Loyalties
4. Product Proliferation
5. Government Barriers – Licensing, etc.
20
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