1. Pure Monopoly

2. Characteristics of pure monopoly
Single seller
No close substitutes
“Price maker”
Blocked entry
Non-price competition

3. Economies of scale in a pure monopoly
Economies of Scale = declining average total cost (ATC) as production increases
Pure Monopoly has a constant downward sloping long-run ATC curve
Long Run ATC in Pure Competition
Long Run ATC in Pure Monopoly

4. Economies of scale in a pure monopoly
Economies of Scale in a Pure Monopoly are a barrier to entry for other firms:
Smaller scale = less economies of scale
Massive amounts of start up costs and obtaining financing to launch new large scale production

5. Other Barriers to entry
Patents
Licenses
Control of Resources
Private Property Rights
Locational control of resources
Pricing
Distribution agreements

6. Monopoly demand Assumptions:
Barriers to entry ensure firm’s monopoly
Government doesn’t regulate the monopolist
The firm is a single-price monopolist
Charges same price for all units of output
Monopolist demand curve = market demand curve
Demand curve is not perfectly elastic =
A downward sloping demand curve

7. Marginal Revenue < price
Monopolist can only increase sales by lowering price
But as single-price monopolist – by lowering price for the additional output, it must also lower prices for all of the previous units of production!

8. Marginal Revenue < price
Example:
3 Halo VI video games at $55.00 each = $165
4 Halo VI video games at $45.00 each = $180
Forgone amount (revenue loss) =
3 x $10 ($55 - $45) = $30
MR = $45(1 additional unit) - $30(revenue loss) = $15
P = $45.00
Therefore MR < P

9. Marginal and total revenue curves
Points where Total Revenue is maximized TR D MR

10. Profit maximization
Monopolistic firm competes for resources (just like in pure competition!)
Monopolistic firm will produce where MR = MC (just like in pure competition!)
Monopolistic firm will produce at the level of production which has the greatest positive difference between TR and TC (just like in pure competition!)

11. Supply Curve in Pure Monopoly
Is there a supply curve in pure monopoly?
No!!!!
Why???
There is no unique relationship between price and quantity supplied. The price and quantity supplied will always depend on the location of the demand curve!

12. Marginal Cost and revenue curves
Economic Profits MC
ATC
Profit Maximization:
MC = MR P D QD MR

13. Misconceptions about monopolies
Monopolists cannot charge the highest price it can get
Maximize profits where TR – TC is greatest
Depends on quantity sold and price
Total profits is the goal of monopolists
Unit profit does not indicate profit maximization
Pure monopoly doesn’t guarantee profit

14. Losses in monopoly Causes of Loss: Effects of Loss:
Change in people’s tastes
Upward shifting cost curves (ex: rise in resources)
Effects of Loss:
Monopoly firm will continue to operate for a while even if incurring losses IF
Total loss < fixed costs
Price > AVC
Firm will reallocate resources to more profitable industries

15. Economic effects of monopoly
Monopolies will sell less products at a higher price
Monopoly price will exceed marginal cost and marginal revenue b/c consumers will still pay at the higher level
Allocative efficiency is not achieved
Productive efficiency is not achieved
Efficiency loss (or deadweight loss) occurs

16. Income effects of monopoly
Income distribution more unequal
Business owners receive unbalance share of income from consumers

17. Cost complications of monopoly
Extensive Economies of Scale = monopoly has a lower ATC than purely competitive firms
X-inefficiency – output is produced at a higher cost than is necessary to produce it (no incentive to be more efficient)
Rent-seeking behavior – trying to obtain/maintain a monopoly even at a cost to the consumer or society
Rate of technological advances slowed – less incentives to improve technology which would improve efficiency

18. Price discrimination
Occurs when a given product is sold at more than one price and the price differences are not based on cost differences
Charging each customer a single market maximum price
Charging each customer one price for the first set of units purchased and a lower price for subsequent sets of units (bulk purchases)
Charging one group of customers one price and another group a different price

19. Price discrimination Success = Examples:
Monopoly power to control output and price
Ability to segregate the market (based on differing elasticities of demand)
Buyers unable to resell the original product or service
Examples:
Airline tickets (business vs. coach)
Electric utilities (higher rates during the day)
Discount coupons
Movie theaters and golf courses

20. Price discrimination
Different groups result in different demand curves and MR curves
Results in different profit maximization and quantity levels
Each segment still follows MR = MC output and price level
Don’t write this down!!!

21. Price discrimination and consumer surplus

22. Price discrimination and profit
Therefore, a price discriminating monopolist will earn profits like this:
Notice that for the price discriminating monopolist the MR and the Demand curve are the same!

23. Socially optimal price vs. Fair return price
Gov’t might set a price at the “socially optimal price” (P = MC) – where production is allocatively efficient
OR…Gov’ts may set artificial price level higher/lower than the socially optimum price (Fair Return Price)
To give the firm a “fair return” on it’s investment and avoid losses
Where P = ATC
EX: Washington Metro
Right now P < ATC so govt’s have to subsidize Metro

24. Marginal Cost and revenue curves
Economic Profits
Socially Optimal Price:
MC = D MC
Fair Return Price:
ATC = D
(Earn only NORMAL Profits)
ATC P
Profit Maximization:
MC = MR D QD MR

25. Draw a graph
On a piece of paper draw the graph for a single-price monopolist experiencing economic losses!
On your graph, label the following
The axis (or axes)
Demand Curve
Marginal Revenue Curve
Marginal Cost Curve
Average Total Cost Curve
Profit Maximizing Price (Pm) and Quantity (Qm)
The area of economic losses (shaded completely)
The Fair Return Price (Pfr) and Quantity (Qfr)
The Socially Optimal (or allocatively efficient) Price (Pso) and Quantity (Qso)
The point of productive efficiency (PE)

26. Crash course summary