1. Simple Monopoly Lecture 23
Dr. Jennifer P. Wissink
©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved.
April 23, 2018

2. Announcements(micro)-Spring 2018
About Prelim 2
See Blackboard for message.
Keep working hard!
About the final
Cumulative
Will stress LECTURE material since we drew the line for Prelim 2 more than anything else.
1st Final is Thursday May 17 at 9am in Uris Hall Aud. Please sign-up using the link on Bb (see left hand side menu) ASAP.
2nd Final is Monday May 21 at 9am in Barton Hall West (side closer to Statler). Note this is a venue change from what had been posted. Make special note of the location change.

3. Sources of Monopoly Entry Barriers
Technical:
Natural monopoly
Vital input ownership
Technical secrets (the better mousetrap)
Legal:
Patents
Franchises
Licenses
Strategic:
Buy ‘em up
Blow ‘em up
Let’s make a deal
AT&T and Time Warner Chiefs to Testify,

4. Natural Monopoly versus Perfect Competition (& Non-natural Monopoly)

5. Monopoly Caveats Monopoly does not imply you’re big.
Big does not imply you’re a monopoly.
Monopoly does not imply you have absolute and unlimited control over price.
Monopoly does not imply you must have positive economic profit.
Short run profit does not imply monopoly power.
Monopoly does not imply a badly behaved firm.

6. The Classic Simple Monopoly
Polar extreme from perfect competition.
Monopolist is a “price maker” rather than a “price taker”.
Market demand = firm demand
Dmarket=δfirm (and it is downward sloping)
The simple monopolist abides by the “law of one price.” Everyone pays the same market price for all units purchased, there is no price discrimination... yet.
Cost curves are pretty much the same (except in the case of natural monopoly – which we ignore).
The big change from before is in the demand side of the profit function.

7. Relationship Between Price & Marginal Revenue for the Simple Monopolist
For all quantities greater than zero, the simple monopolist’s price will be larger than the corresponding marginal revenue.
Why?
To sell an additional unit, the simple monopolist must lower the price on ALL units sold.
Example:

8. Recall: Rules for SR Profit Maximization
Suppose we are in the short run.
Profit is still: π = total revenue – short run total cost
Rules for profit maximization are still the same as before.
If QSM maximizes profit, then
(1) mr(at QSM) = srmc(at QSM).
(2) QSM is a at a max and not a min.
(3) at QSM it’s worth operating, rather than shutting down.
Now apply to the simple monopolist!
No real change in the looks of srmc, sratc, sravc, i.e., The Cost Graph
Big change in the look of firm demand and marginal revenue.
Market Demand (D) = perceived demand (δ)
Marginal Revenue (mr) is below Market Demand (D) for all Q>0
Fact: when market demand is linear,  marginal revenue has the “same intercept and twice the slope”.

9. Simple Monopoly Marginal Revenue with Linear Demand
Suppose demand is: QD = 10 – 1/2P or PD = 20 – 2Q
With a linear demand, marginal revenue will have the same vertical intercept and will be twice as steep!
Total Revenue(tr) = PD∙Q
tr = (20 – 2Q)∙Q
So tr = 20Q - 2Q2
Marginal Revenue(mr)
me = ∆tr/∆Quantity
mr = Q
Now compare mr with PD
Caution: Make sure P is on left hand side before doing this! $
$20
If PD = 20 – 2Q
Demand 5 10 Q
mrSM
Then mrsm = 20 – 4Q

10. Graphical Display of Simple Monopolist’s Short Run Profit Maximizing Solution
(1) The monopolist sets marginal revenue equal to marginal cost to get QSM.
(1a) Then goes up to the demand curve to get the price PSM.
(2) Then makes sure he is at a max (and not a min).
(3) Then makes sure it is worth operating in the short run. $
srmc
PSM
Demand
QSM Q
mrSM

11. Algebra for Simple Monopolist’s Short Run Profit Maximizing Solution$ 20
srmc
PSM
Demand
QSM 5 10 Q
mrSM

12. The Author vs. Publisher Predicament
$TE=P•Q
Price
Demand is Price elastic
Demand is Price inelastic
Demand
Quantity
Quantity
your graph
mrSM

13. Simple Monopoly with a Table: New Demand & Cost Information

15. Long Run Profit Maximization with Simple Monopoly
Pretty much the same story as in the short run, but, use correctly calculated long run cost information.
Positive economic profit invites entry, but since there are barriers to entry positive economic profit can persist.
Negative economic profit encourages exit, and if the monopolist can get out he will.
Monopolist might make long run adjustments to changes in the economic environment.