What’s the difference between monopoly and competition? Monopoly: one firm selling a product Competition: many firms selling same product Other models (we will consider later) –Monopolistic Competition: many firms differentiated products –Oligolopy: few firms Model versus reality

Examples of Monopoly U.S. Postal Service Local telephone service Water, electricity, cable TV Standard Oil OPEC? Computer Chips? Internet Browsers? Campus Bookstore?

Elements of a Model of a Monopoly Maximize profits Cost curves –marginal cost (MC), average total cost (ATC) Faces downward sloping demand curve

Market Power

An Example of a Monopoly

Why is marginal revenue less than demand? Lower price tends to reduce revenues (see diagram) demand is average revenue: that is P = (PxQ/Q) =AR –demand curve slopes down implies: –MR < AR = demand

Condition for Profit Maximization Marginal Revenue equals Marginal Cost MR = MC Intuitive Rationale Graphical illustration

The Graph of a Monopoly

Now let’s sketch a graph of a monopoly by hand

Monopolies sometimes run losses

Do monopolies cause deadweight loss? Yes, because the monopoly produces too little.

Deadweight Loss from Monopoly

Key Conclusions Monopoly output less than competitive output P> MC Deadweight loss is created by a monopoly Market Failure