1. micro Economics Unit 9 Slide 1 Created: Jan 2007 by Jim Luke. Two men have been supreme in creating the modern world: Rockefeller and Bismarck. One in economics, the other in politics, refuted the liberal dream of universal happiness through individual competition, substituting monopoly and the corporate state. -- Bertrand Russell Long before there was Bill, there was John D and the other robber barons.

2. micro Economics Unit 9 Slide 2 Created: Jan 2007 by Jim Luke. Market Structures: Monopoly – the opposite of Perfect Competition

3. micro Economics Unit 9 Slide 3 Created: Jan 2007 by Jim Luke. Monopoly Conditions Sole Supplier of Good Sole Supplier of Good No Close Substitutes and/or Inelastic Demand No Close Substitutes and/or Inelastic Demand Barriers to Entry Barriers to Entry  New Firms Not Able to Enter Industry

4. micro Economics Unit 9 Slide 4 Created: Jan 2007 by Jim Luke. Market Demand = Monopolist’s Demand Slopes Downward  Max TR @ e=1.0  Can choose P or Q  Demand Determines the Other Monopolist is Price Maker $7,000 6,750 3 0 4 Price per Diamond 1 – carat diamonds per day D = Average revenue LOSS GAINGAIN

5. micro Economics Unit 9 Slide 5 Created: Jan 2007 by Jim Luke. Profit Maximization: Simple Monopoly 1. 1. Find Q where MR=MC 2. 2. Find highest Price for that Q (go up to D curve) same logic as in Competition – only the curves have moved

6. micro Economics Unit 9 Slide 6 Created: Jan 2007 by Jim Luke. Simple Monopoly Likely to make profits in short-run Likely to make profits in short-run No change over long-run No change over long-run  Entry barriers prevent competition

7. micro Economics Unit 9 Slide 7 Created: Jan 2007 by Jim Luke. Price Discrimination Monopolist charges different prices to different groups of customers depending on willingness to pay Monopolist captures more of consumer surplus Consumers (as a group) are worse off

8. micro Economics Unit 9 Slide 8 Created: Jan 2007 by Jim Luke. Barriers to Entry Legal restrictions   Govt. Licenses   Patents   Copyrights   Restrictive Laws Economies of scale   “Natural Monopolies” Control of Essential Resource

9. micro Economics Unit 9 Slide 9 Created: Jan 2007 by Jim Luke. Market Performance Under Monopoly Monopoly Results   NOT production efficient   not lowest ATC   NOT Allocation Efficient   P not equal to MC   Too little Q produced   Deadweight loss

10. micro Economics Unit 9 Slide 10 Created: Jan 2007 by Jim Luke. Problems From Monopolies Rent seeking activities Inefficiency Increases No Innovation No Choice Downstream control & Restricted Rights