Definition, Causes & Pricing Chapter 15 Monopolies Definition, Causes & Pricing Chapter 15

Monopoly Market Characteristics One Seller Unique Product—no substitutes Difficult/Impossible to enter or leave industry Limited Information Great deal of price control— Price Setters

WHY DO MONOPOLIES ARISE? The fundamental cause of monopoly is Barriers to Entry 3 primary sources of barriers: 1) Ownership of a key resource 2) Government gives one firm the exclusive right to produce 3) Costs of production make a single producer more efficient

Natural Monopolies natural monopoly- when a single firm can supply a good or service at a smaller cost develop in industries with large economies of scale Utilities: Electricity, Gas & Water Qty Produce ATC

Demand Curves Competitive vs. Monopoly ’ (a) Competitive Firm’s Demand Curve (b) Monopolist’s Demand Curve Price Price Demand Demand Quantity of Output Quantity of Output A Monopoly is the sole producer => therefore it faces the market demand curve

A Monopoly’s Revenue When a monopoly increases the amount it sells, it has 2 affects on total revenue: (P * Qty) 1) The output effect—more output is sold, Qty 2) The price effect—price falls, P Notice that: P > MR

Demand & Marginal-Revenue Price If a monopoly wants to sell more, it must lower price. $11 10 Price falls for ALL units sold. 9 8 7 This is why MR is < P. 6 5 4 Price = AR 3 Demand (average revenue) 2 Marginal revenue 1 –1 1 2 3 4 5 6 7 8 Quantity of Water –2 –3 –4

Profit Maximization All profit-maximizing firms set: MR =MC Competitive firms: P = MR = MC Monopoly firm = P > MR = MC

Monopoly Profit Maximization Costs and Step #2: The demand curve shows the price consistent with this quantity. Revenue Step #1 Find Profit Max. Level MR = MC Marginal revenue Demand Monopoly price QMAX B Marginal cost Average total cost A Q Q Quantity

The Monopolist’s Profit Costs and Revenue Profit = (P – ATC) * Qty ($20 - $10) * 200 = $2,000 profit Marginal revenue Demand Marginal cost $20 Monopoly price QMAX B C E D Monopoly profit Average total cost $10 Average total cost Quantity 200

Worksheet Pure Monopoly