Monopoly
Lesson 12
Sections 61, 62
Monopolies
• Monopolies exist when there is a single supplier for a good,
and the barriers to entry prevent other suppliers from
entering the market.
• While monopolies are generally considered to be bad because
they can limit the quantity supplied and can charge whatever
they want, there are other kinds of monopolies that
economists love.
The Monopolists Demand Curve
• The demand curve for a Monopoly is
downward sloping, showing that perfect
competition does not exist.
Prices and Monopolies
• Monopolies have a greater ability to set prices than
does a business that is competing for customers.
• In these cases, the monopoly business wants to get
the most profit they can, by setting the price at the
point of diminishing returns, as opposed to the cost
of making the item (which is supposed to be the
place where, in perfect competition, the various
sellers will sell their products).
• In perfect competition
demand = price =
marginal revenue
(D=P=MR)
• For the monopolist,
marginal revenue is a
downward sloping curve
that appears below the
demand curve.
• Maximum revenue
occurs at the point of
diminishing returns
Monopolists Profit-Maximizing Output
and Price
• To maximize profit, if marginal revenue exceeds marginal cost,
profit is increased by producing more.
• If marginal revenue is less than marginal cost, profit is
increased by producing less.
• MR=MC is the profit maximizing quantity of output.
Monopoly versus Perfect Competition
• The monopolist makes a profit by producing less
than perfect competition, thus raising the price by
limiting quantity.
Monopoly Price
Making
• Because a monopoly is a
price maker, rather than a
price taker, it can set it’s
price at the point of
maximum profit.
• Profit = (P – ATC) * Q
• This means that there is a
deadweight loss that
occurs where product is
not produced because
the monopoly sets the
price above equilibrium.
Figure 62.1 Monopoly Causes Inefficiency
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Natural Monopolies
• A natural monopoly is where the ability to provide a
good or service is limited by a large infrastructure,
like water and electricity.
• Because it takes such a large investment to put up
the wires, or make the canals and pipes, it is
considered foolish to build a second set for each
household just for the sake of competition.
• In these cases, one firm is allowed to have a
monopoly in that area, and the rates it can charge
are regulated.
Government Monopolies
• The government can allow some businesses to have a
limited monopoly in certain cases.
• One is for patents, that allows a person or business to
have the sole right to produce and sell a particular item,
like a new drug.
• Government can also permit a particular seller to have a
limited franchise within a specific area, like a school or
national park, where it is believed good to have some
form of business there, but not desirable to have many.
• Price Regulations for government monopolies. (PGE)
• Public Ownership as alternative
Figure 62.2 Unregulated and Regulated Natural Monopoly
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers