Monopoly Chapter 7 Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.McGraw-Hill/Irwin

7-2 Monopoly Structure: Monopoly Market power is the ability to alter the price of a good or service. A monopoly is one firm that produces the entire market supply of a particular good or service. Since there is only one firm in a monopoly industry, the firm is the industry. LO-1

7-3 Monopoly = Industry The firm’s demand curve is identical to the market demand curve for the product. –Market demand is the total quantity of a good or service people are willing and able to buy at alternative prices in a given time period. LO-1

7-4 Price versus Marginal Revenue Marginal revenue (MR) is the change in total revenue that results from a one- unit increase in quantity sold. Price equals marginal revenue only for perfectly competitive firms. Marginal revenue is always less than price for a monopolist. LO-1

7-5 Price versus Marginal Revenue A monopolist can sell additional output only if it reduces prices. The MR curve lies below the demand curve at every point but the first. LO-2

7-6 Figure 7.1

7-7 Profit Maximization The monopolist uses the profit- maximization rule to determine its rate of output. According to the rule, a monopolist maximizes profit at the rate of output where MR = MC. LO-3

7-8 The profit maximization rule applies to all firms: –A perfectly competitive firm produces the quantity where MC = MR (= p) –A monopolist produces the quantity where MC = MR (< p) Profit Maximization LO-3

7-9 Figure 7.2

7-10 The Monopoly Price The intersection of the marginal revenue and marginal cost curves establishes the profit-maximizing rate of output. The demand curve tells us the highest price consumers are willing to pay for that specific quantity of output. Only one price is compatible with the profit-maximizing rate of output. LO-3

7-11 Monopoly Profits Total profit equals profit per unit times the number of units produced. Profit per unit = price minus average total cost Profit per unit = p – ATC Total profit = profit per unit times quantity Total profit = (p – ATC) x q LO-3

7-12 Monopoly versus Competitive Outcomes A monopolist produces less and charges a higher price than would a competitive industry. LO-4

7-13 Figure 7.3

7-14 Barriers to Entry Obstacles that make it difficult or impossible for would-be producers to enter a particular market. Examples include patents, legal harassment, exclusive licensing, bundled products, and government franchises. LO-4

7-15 Competition versus Monopoly In competition, as well as in monopoly, high prices and profits signal consumers’ demand for more output. In competition, the high profits attract new suppliers. In monopoly, barriers to entry are erected to exclude potential competition. LO-4

7-16 In competition, production and supplies expand, and prices slide down the market demand curve. In monopoly, production and supplies are constrained, and prices don’t move down the market demand curve. Competition versus Monopoly LO-4

7-17 In competition, a new equilibrium is established, and average costs of production approach their minimum. In monopoly, no new equilibrium is established, and average costs are not necessarily at or near a minimum. Competition versus Monopoly LO-4

7-18 In competition, economic profits approach zero, and price equals marginal cost throughout the process. In monopoly, economic profits are at a maximum, and price exceeds marginal cost at all times. Competition versus Monopoly LO-4

7-19 In competition, the profit squeeze pressures firms to reduce costs or improve product quality. In monopoly, there is no profit squeeze to pressure the firm to reduce costs or improve product quality. Competition versus Monopoly LO-4

7-20 Competition versus Monopoly

7-21 Near Monopolies In duopoly two firms together produce the industry output. In oligopoly several firms dominate the market. In monopolistic competition many firms each have a monopoly on its own brand image but must still contend with competing brands. LO-4

7-22 Redeeming Qualities of Monopolies? Monopolies could also benefit society. We must consider: Research and Development Entrepreneurial Incentives Economies of Scale Natural Monopolies Contestable Markets Structure versus behavior LO-5

End of Chapter 7