Principles of Economics

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Presentation transcript:

Principles of Economics Chapter 9 Monopoly PowerPoint Image Slideshow

history In the mid-nineteenth century, the United States, specifically the Southern states, had a near monopoly in the cotton supplied to Great Britain. These states attempted to leverage this economic power into political power—trying to sway Great Britain to formally recognize the Confederate States of America.

Characteristics of Monopoly One seller of a good or service in the market Legal monopolies are created because of legal rights (patents and copyrights) Natural monopolies are created by the government since they operate with high fixed costs (public utilities: gas, water, electricity)

Natural monopoly In this market, the demand curve intersects the LRAC curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the Minimum Efficient Scale. The government permits the monopoly to operate, but it would regulate it by setting P=LRAC and requires profit to be invested in technological advancement for the firm to be more efficient and lower AC producer.

Natural monopoly

Perfect Competition vs. monopoly A perfectly competitive firm faces a horizontal demand at the market price. The firm can sell as much as it produces at the same price. A monopolistic firm faces the entire market demand. So, it has to choose a combination of price and quantity that maximizes profits.

Perfect Competition vs. monopoly

Firm demand and marginal revenue Because the firm faces the market demand curve, its MR lies beneath the demand curve and intersects the horizontal axis at the middle of Q-intercept and zero.

Profit maximization The profit maximizing price and quantity combination is where the distance between TR and TC is largest.

Profit maximization Profit maximization is also determined by the MR = MC rule. If MR > MC, the firm raises quantity. If MC > MR, the firm cuts quantity. Optimal quantity is where MR = MC.

Price & quantity determination Set MR = MC to determine Q1. Refer to the demand and vertical axis to determine P1. Q1 and P1 are profit maximizing quantity and price. At Q1 determine AC = P2. P1 > P2 for the firm making excess profit = P2SR P1.

Price & quantity determination At Q = 4 TR = 900*4 = 3,600 TC = 700*4 = 2,800 Total Profit: TR – TC = (900 – 700)*4 or 3,600 – 2,800 Total Profit = 800