1. Monopoly versus Perfect Competition
No Monopolies!
Monopoly versus Perfect Competition

2. Demand Curves Competitive vs. Monopoly
(b) Monopolist’s Demand Curve ’
(a) Competitive Firm’s Demand Curve
Price
Price MC MC
D = MR
$15
D ≠ MR
Quantity of Output
Quantity of Output
A Monopoly is the sole producer => therefore it faces the entire market demand curve

3. Marginal Revenue Handout

4. Demand & Marginal-Revenue
Price
If a monopoly wants to sell more, it must lower price.
$11 10
Price falls for ALL units sold. 9 8 7
This is why MR is < P. 6 5 4
Price = AR 3
Demand
(average
revenue) 2
Marginal
revenue 1 –1 1 2 3 4 5 6 7 8
Quantity of Water –2 –3 –4

5. Profit Maximization All profit-maximizing firms set: MR =MC
Competitive firms: P = MR = MC
Monopoly firm = P > MR = MC

6. Monopoly vs. Perfect Competition
Monopolies charge a higher price & provide lower Qty
Monopoly charges a Price > MC
Competitive firms: Price = MC
Monopolies create deadweight loss to society
Competitive firms: no deadweight loss

7. Monopolist Equilibrium
Costs and
Revenue MR D
Profit =
(P – ATC) * Qty
($20 - $10) * 100 =
$1,000 profit MC
$20 E1 P1 Q1
Monopoly
Profit
ATC
Set MR = MC
$10
ATC
Quantity
100

8. Sample Monopoly Equilibrium
Costs and
Revenue
Maximize Profit set MR = MC
Profit = (P – ATC) * Qty MR D MC
ATC P1 Q1 E1
Monopoly
profit
Maximize Total Revenue:
Set MR = 0
ATC
Quantity

9. Pure Monopoly Worksheet

10. Pure Monopoly Problem #1
Costs and
Revenue
Profit = $150 per unit
(P – ATC) * Qty
($750 - $600) * 4 =
$600 profit D MR MC
ATC
$600
$750 P1 Q1 E1
Monopoly
profit
Produce 4 Units
MC = $300
ATC
Quantity 4

11. Worksheet Problem #2 MC ATC D MR Profit = (P – ATC) * Qty
Costs and
Revenue
Profit =
(P – ATC) * Qty
($15 - $8) * 100 =
$700 profit MR D MC
$15 P1 Q1 E1
Monopoly
profit
ATC $8
ATC
Quantity
100

12. Quick Review: PC vs. Monopoly

13. Collusion & Cartels Collusion Cartel
An agreement among firms about Qty to produce or price to charge
Antitrust laws prohibit this behavior in USA
Cartel
A group of firms acting in unison
Example: OPEC
OPEC Meeting

14. How to become a price setter

15. DeBeers Video

16. Graphing Supply & Demand E2 Q2 S1 S1 D1 D1 P1 Q1 P1 E1 E1 Q1
Demand is kept artificially high & inelastic through advertising
Supply is kept artificially low by DeBeers
End Result: Higher prices paid & larger quantity sold