Long-Run Competitive Equilibrium
Allocatively & Productively Efficient
P
MC
Price
ATC
P
MR
TR = TC
P = ATC
Price = MC = Minimum ATC
(normal profit= zero econ. profit)
Q
Q
Quantity
Pure Monopoly
CHAPTER TWENTY-FOUR
Four Market Models
Pure Monopoly
Pure
Competition
Market Structure Continuum
Characteristics of Monopoly
• Single Seller
• No Close Substitutes
• “Price Maker”
• Blocked Entry
• Advertising to increase
demand
Barriers to Entry
• Economies of Scale
• Legal Barriers: Patents & Licenses
• Ownership of Essential Resources
Monopolies are relatively rare
There are times when monopoly is desired
Average Total Cost
Economies of Scale:
The Natural Monopoly Case
$20
15
10
0
50
100
Quantity
200
Average Total Cost
Economies of Scale:
The Natural Monopoly Case
$20
15
ATC
The most significant barrier to
entry is economies of scale. Firms
that are big enough to continue expanding
to keep costs low. In fact a natural monopoly in
this case should be encouraged.
10
0
50
100
Quantity
200
Average Total Cost
Economies of Scale:
The Natural Monopoly Case
$20
15
ATC
10
If ATC declines over extended output,
least-cost production is realized only if
there is one producer - a natural monopoly
0
50
100
Quantity
200
Monopoly Demand
• The firm that operates as a monopoly
encounters a downward sloping demand.
• The demand curve is the market demand.
• The monopolist can only increase sales
by charging a lower price.
Price Exceeds Marginal Revenue
example...
Price & Marginal Revenue Under Monopoly
P
As price decreases from
$142 to $132...
$142
132
D
1
2
3
4
5
6
Q
Price & Marginal Revenue Under Monopoly
P
$142
132
As price decreases from
$142 to $132...
Revenue losses
occur
Loss = $30
D
1
2
3
4
5
6
Q
Price & Marginal Revenue Under Monopoly
P
$142
132
Or subtract the
total revenue at
the price of $142
and quantity of 3=
(426) from the total
revenue of 4 units
sold at a price of
132 =528.
MR=102 at
output of 4.
As price decreases from
$142 to $132...
but revenue will
increase with the
additional
units sold
Loss = $30
D
Gain = $132
1
2
3
4
5
6
Q
Price & Marginal Revenue Under Monopoly
P
$142
132
As price decreases from
$142 to $132...
but revenue will
increase with the
additional
units sold
Loss = $30
Marginal revenue
Gain = $132
will necessarily be
less than price
1
2
3
4
5
6
Q
D
Demand, Marginal Revenue, Total Revenue
Imperfectly Competitive Firm
Dollars
200
Elastic
150
Inelastic
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
750
500
250
TR
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Demand, Marginal Revenue, Total Revenue
Imperfectly Competitive Firm
Dollars
200
Elastic
150
Inelastic
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
750
500
250
TR
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Demand, Marginal Revenue, Total Revenue
Imperfectly Competitive Firm
Dollars
200
150
Elastic
Unit
Inelastic
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Dollars
750
Q
Eat Up Idiots!!
500
250
TR
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Output and Price Determination
• Cost Data – the monopolist hires
resources competitively in the
factor market and so the cost
curves will be similar to Pure
Competition.
Output and Price Determination
• Cost Data
• MR = MC Rule – This will be the
same profit maximizing point.
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve –
•There is no set P/Q combinations
as in Pure Competition. The
price the monopolist is able to
charge depends on the elasticity
of demand at that quantity.
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Firm is the Industry
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Firm is the Industry
• Firm is a Price Searcher/Maker
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Firm is the Industry
• Firm is a Price Searcher/Maker
• Monopoly Pricing Misconceptions
Not Highest Price - seeks maximum
profit not maximum price.
Profit Maximization Under Monopoly
200
P
175
150
125
100
75
50
25
0
1
2
3
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
200
P
175
150
125
100
D
75
50
25
0
1
2
3
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
200
P
175
150
125
100
D
75
50
25
MR
0
1
2
3
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
200
P
MC
175
150
$122
125
100
D
75
50
25
MR
0
1
2
3
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
200
P
MC
175
150
$122
125
ATC
100
D
75
50
25
MR
0
1
2
3
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
200
P
MC
175
150
$122
$94
125
Econ. Profit
100
ATC
D
75
50
25
MR
0
1
2
3
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
200
P
175
150
$122
$94
MC
Profit
Per Unit
125
Econ. Profit
100
ATC
D
75
Competitive
Price
50
MR = MC
25
0
1
2
3
MR
4
5
6
7
8
9
10
Q
Loss Minimization Under Monopoly
200
P
Loss
Per Unit
175
MC
150
ATC
Loss
125
AVC
100
D
75
50
MR = MC
25
0
1
2
3
MR
4
5
6
7
8
9
10
Q
Profit Maximization Under Monopoly
P
S = MC
Monopolist
will sell less
units at a
higher price
than in
competition
Pm
Pc
D
MR
Qm
Qc
Q
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market Segregation
3 - No Resale
Consequences...
1 - More Profits
2 - More Production
Single Price Vs. Price Discrimination
MC
Price and Costs
P
ATC
D
MR
Q1
Q
Single Price Vs. Price Discrimination
Profits with
a single price
Price and Costs
P
MC
ATC
D
MR
Q1
Q
Single Price Vs. Price Discrimination
Price and Costs
P
Profits with
price
discrimination
MC = S
ATC
D = MR
Q1
Q2
Q
Regulated Monopoly
Price and Costs
P
ATC
MC
D
MR
Q
Regulated Monopoly
Price and Costs
P
Socially Optimum Price
Price = MC
ATC
MC
D
MR
Q
Regulated Monopoly
Price and Costs
P
Fair Return Price
Price = ATC
ATC
MC
D
MR
Q
Unregulated Monopoly Price
Price and Costs
P
Monopoly Price
MR = MC
ATC
MC
D
MR
Q
TP=$8
TR=$32
TR = TC
TC=$24
$36 = $36
4
$8
$8
$6
$32
$24
$8 – $6 = $2
$32 – $24 = $8
P=$6 Q=6
P
Unregulated
Monopolists
Price
P@
Profit max
MC
Dead
Weight
Dead
Loss
Weight
Loss
P = ATC
P = MC
Q
MR Q Q Darp
ATC
Q