Monopoly: This is a situation where a single producer (firm) is the sole producer of a good that has no close substitutes.

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Presentation transcript:

Monopoly: This is a situation where a single producer (firm) is the sole producer of a good that has no close substitutes.

Sources of Monopoly:  The firm may control the entire supply of raw materials required to produce that output.  The firm may have a patent or copyright. Natural Monopoly  The case of “Natural Monopoly”. Economies of Scale may permit only one firm to be efficient in the market.

D ATC 0 P Q Natural Monopoly

Sources of Monopoly:  The firm may control the entire supply of raw materials required to produce that output.  The firm may have a patent or copyright. Natural Monopoly  The case of “Natural Monopoly”. Economies of Scale may permit only one firm to be efficient in the market.  The case of Government Franchises.  Through Mergers and Acquisitions.

Characteristics of Monopoly:  A single seller: A single firm produces all industry output. The monopoly is the industry.  Entry into the industry is totally blocked.  Imperfect dissemination of information: Cost, price, and product quality information are withheld from uninformed buyers.

TR 2 =AR 2 =8=P TR 3 =AR 3 =7=P MR 3 = 0 D or AR MR 8(2)=16 7(3)=21 TR 3 -TR 2 =21-16=5 Price Quantity

ATC AVC MC MR D P Q0 b c a Quantity Price ATC AVC MR=MC

ATC AVC MC MR D Q0 a Quantity Price P c b

ATC AVC MC MRD 0 a Q P Quantity Price c b n m

Find the Profit maximizing output from the following information. Demand InformationCost Information PQ QTC TR MR MC Profit = TR – TC = 32 – 19 = 13

Part b: