1. (normal profit= zero econ. profit)
Long-Run Competitive Equilibrium
Allocatively & Productively Efficient P MC
ATC
Price P MR
TR = TC
P = ATC
Price = MC = Minimum ATC
(normal profit= zero econ. profit) Q Q
Quantity

3. Pure Monopoly
CHAPTER TWENTY-FOUR

4. Four Market Models Pure Monopoly Market Structure Continuum Pure
Competition
Market Structure Continuum

5. Advertising to increase demand
Characteristics of Monopoly
Single Seller
No Close Substitutes
“Price Maker”
Blocked Entry
Advertising to increase
demand

6. Barriers to Entry Economies of Scale
Legal Barriers: Patents & Licenses
Ownership of Essential Resources
Monopolies are relatively rare
There are times when monopoly is desired

7. The Natural Monopoly Case
Economies of Scale:
The Natural Monopoly Case
$20 15
Average Total Cost 10 50
100
200
Quantity

8. The Natural Monopoly Case
Economies of Scale:
The Natural Monopoly Case
$20 15
ATC
The most significant barrier to
entry is economies of scale. Firms
that are big enough to continue expanding
to keep costs low. In fact a natural monopoly in
this case should be encouraged.
Average Total Cost 10 50
100
200
Quantity

9. The Natural Monopoly Case
Economies of Scale:
The Natural Monopoly Case
$20 15
ATC
Average Total Cost 10
If ATC declines over extended output,
least-cost production is realized only if
there is one producer - a natural monopoly 50
100
200
Quantity

10. Monopoly Demand Price Exceeds Marginal Revenue example...
The firm that operates as a monopoly
encounters a downward sloping demand.
The demand curve is the market demand.
The monopolist can only increase sales
by charging a lower price.
Price Exceeds Marginal Revenue
example...

11. Price & Marginal Revenue Under Monopoly
As price decreases from
$142 to $132...
$142
132 D Q

12. Price & Marginal Revenue Under Monopoly
As price decreases from
$142 to $132...
Revenue losses
occur
$142
132
Loss = $30 D Q

13. Price & Marginal Revenue Under Monopoly
As price decreases from
$142 to $132...
but revenue will
increase with the
additional
units sold
$142
132
Loss = $30
Or subtract the
total revenue at
the price of $142
and quantity of 3=
(426) from the total
revenue of 4 units
sold at a price of
132 =528.
MR=102 at
output of 4. D
Gain = $132 Q

14. Price & Marginal Revenue Under Monopoly
As price decreases from
$142 to $132...
but revenue will
increase with the
additional
units sold
$142
132
Loss = $30
Marginal revenue
will necessarily be
less than price D
Gain = $132 Q

15. Demand, Marginal Revenue, Total Revenue Imperfectly Competitive Firm
200
150 50
Elastic
Dollars
Inelastic MR D Q
750
500
250
Dollars TR Q

16. Demand, Marginal Revenue, Total Revenue Imperfectly Competitive Firm
200
150 50
Elastic
Dollars
Inelastic MR D Q
750
500
250
Dollars TR Q

17. Demand, Marginal Revenue, Total Revenue Imperfectly Competitive Firm
200
150 50
Elastic
Unit
Dollars
Inelastic D MR Q
Eat Up Idiots!!
750
500
250
Dollars TR Q

18. Output and Price Determination
Cost Data – the monopolist hires
resources competitively in the
factor market and so the cost
curves will be similar to Pure
Competition.

19. Output and Price Determination
Cost Data
MR = MC Rule – This will be the
same profit maximizing point.

20. Output and Price Determination
Cost Data
MR = MC Rule
No Monopoly Supply Curve –
There is no set P/Q combinations
as in Pure Competition. The
price the monopolist is able to
charge depends on the elasticity
of demand at that quantity.

21. Output and Price Determination
Cost Data
MR = MC Rule
No Monopoly Supply Curve
Firm is the Industry

22. Output and Price Determination
Cost Data
MR = MC Rule
No Monopoly Supply Curve
Firm is the Industry
Firm is a Price Searcher/Maker

23. Output and Price Determination
Cost Data
MR = MC Rule
No Monopoly Supply Curve
Firm is the Industry
Firm is a Price Searcher/Maker
Monopoly Pricing Misconceptions
Not Highest Price - seeks maximum
profit not maximum price.

24. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 Q

25. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 D Q

26. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 D MR Q

27. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 MC
$122 D MR Q

28. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 MC
$122
ATC D MR Q

29. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 MC
$122
Econ. Profit
ATC
$94 D MR Q

30. Profit Maximization Under Monopoly
200
175
150
125
100 75 50 25 MC
Profit
Per Unit
$122
Econ. Profit
ATC
$94 D
Competitive
Price
MR = MC MR Q

31. Loss Minimization Under Monopoly
200
175
150
125
100 75 50 25
Loss
Per Unit MC
ATC
Loss
AVC D
MR = MC MR Q

32. Profit Maximization Under Monopoly
S = MC
Monopolist
will sell less
units at a
higher price
than in
competition Pm Pc D MR Q Qm Qc

33. Price Discrimination 1 - Monopoly Power 2 - Market Segregation
Conditions...
1 - Monopoly Power
2 - Market Segregation
3 - No Resale
Consequences...
1 - More Profits
2 - More Production

34. Single Price Vs. Price DiscriminationMC P
ATC
Price and Costs D MR Q Q1

35. Single Price Vs. Price DiscriminationMC P
Profits with
a single price
ATC
Price and Costs D MR Q Q1

36. Single Price Vs. Price Discrimination
Profits with
price
discrimination
MC = S P
ATC
Price and Costs
D = MR Q Q1 Q2

37. Regulated Monopoly P
Price and Costs
ATC MC D MR Q

38. Socially Optimum Price
Regulated Monopoly P
Socially Optimum Price
Price = MC
Price and Costs
ATC MC D MR Q

39. Regulated Monopoly Fair Return Price Price = ATC P Price and Costs ATCMC D MR Q

40. Unregulated Monopoly Price
MR = MC
Price and Costs
ATC MC D MR Q

41. TR = TC $36 = $36 TP=$8 TR=$32 TC=$24 4 $8 $8 $6 $32 $24 $8 – $6 = $2
$32 – $24 = $8
P=$6 Q=6

42. Natural Monopoly P Unregulated Monopolists Price P @ Profit max MC
Dead
Weight
Loss
Dead
Weight
Loss
P = ATC
ATC
P = MC Q Q Q Q
Darp MR