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