1. Survey of Economics Irvin B. Tucker
Chapter 8 Monopoly
Lecture Slides
Survey of Economics Irvin B. Tucker
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2. What will I learn in this chapter?
How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss
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3. What is a monopoly? A market structure characterized by:
1. Single seller
2. Unique product
3. Impossible entry into the market
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4. What does it mean to have a unique product?
There are no close substitutes for the monopolist’s product
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5. What are some examples of impossible entry?
Owner of a vital resource
Legal barriers
Economies of scale
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6. Ownership of a Vital Resource Legal Barriers Economies of Scale
What are major barriers that prevent new firms from entering and competing with a monopolist?
Ownership of a Vital Resource
Legal Barriers
Economies of Scale
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7. What is the advantage of economies of scale?
Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms
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8. What is a natural monopoly?
An industry in which the long-run average cost of production declines throughout the entire market
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9. What is unique about a natural monopoly?
A single firm will produce output at a lower per-unit cost than two or more firms in the industry
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10. Exhibit 8-1 Minimizing Costs in a Natural Monopoly
5 firms 40 35
2 firms 30 25
1 firm
Cost per Unit (dollars) 20 15
LRAC 10 5 10 20 30 40 50 60 70 80 90
100
110
120
Quantity of Output 10
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11. What is a price maker?
A firm that faces a downward-sloping demand curve
As a result, a monopolist can choose its price along the demand curve.
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12. What is the difference between monopoly and perfect competition?
The D and MR curves of the monopolist are downward sloping; in perfect competition they are equal and horizontal
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13. What is unique about the demand curve for a monopolist?
The monopolist demand curve and the industry demand curve are one in the same
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14. Why is MR < P for all but the first unit of output?
Observe the relationship between P and MR in Exhibit 8.2.
To sell 1 unit, P=$138 and TR=$138.
To sell 2 units, P=$125 and TR=$250.
Compute that TR increases $112 ($250-$125), which means MR=$112.
Notice that at 2 units P=$125>$112 and this gap widens as the units increase.
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15. Exhibit 8.2 Demand, Marginal Revenue, and Total Revenue for Computech as a Monopolist
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16. Exhibit 8-2(a) Monopolist
150
100 50
Demand
Price & Marginal Revenue (dollars) 2 4 8 6 10 12 14
-50
-100
-150 8
Marginal revenue
-200
Quantity of Output (units per hour)
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17. Exhibit 8-2(b) Total Revenue Curve
400
300
Total Revenue (dollars)
200
100
Total Revenue 2 4 6 8 10 12 14 16 18
Quantity of Output (units per hour) 16
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18. Total revenue method MR = MC method
What two methods does a monopolist use to maximize profit or minimize losses?
Total revenue method
MR = MC method
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19. 8.3
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20. Exhibit 8.4 Short-Run Profit Maximization for a Monopolist Using the Total Revenue - Total Cost Method
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21. © 2016 south-Western, a part of Cengage Learning
Exhibit 8.5 Short-Run Profit Maximization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method 21
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22. © 2016 south-Western, a part of Cengage Learning
Exhibit 8.6 Short-Run Loss Minimization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method
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23. Can a monopolist make a profit in the long-run?
If the positions of a monopolist’s demand and cost curves give it a profit and nothing changes these curves, it can make a profit in the long-run
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24. What is price discrimination?
The practice of a seller charging different prices for the same product not justified by cost differences
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25. What is arbitrage?
The practice of earning a profit by buying a good at a low price and reselling the good at a higher price
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26. Exhibit 8-7 Price Discrimination
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27. Is price discrimination unfair?
At the lower price, many buyers benefit from the discrimination by not being excluded from purchasing the product if a higher price were charged.
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28. Is perfect competition efficient?
A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.
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29. Is monopoly efficient?
A monopolist is inefficient because it sets P>MR=MC and resources are underallocated to the production of its product
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30. Exhibit 8-8 Comparing a Perfectly Competitive Firm and a Monopolist30
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31. How does monopoly harm consumers?
It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation
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32. D S=MC Qm Qc Pc MR Pm MR=MC Quantity of Output
Exhibit 8-9 Impact of Monopolizing an Industry
S=MC
Price, Costs, and Revenue (dollars) Pm Pc D MR
MR=MC Qm Qc 32
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Quantity of Output

33. What is the case against monopoly?
Higher price
Charges a Price > MC
Long-run economic profit
Alters the distribution of income to favor monopolist
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34. END