1. Introduction
Perfect Competition was one type of market structure. It had to satisfy many assumptions - some of which are not all that realistic. Now we will look at another market structure which is nearly he opposite of perfect competition
Monopoly - a single firm that produces all the output in a particular market with no close substitutes and high barriers to entry. 4

2. Barriers to Entry
Barriers to Entry are what keeps monopoly from becoming like a perfectly competitive market
Barriers to entry are things that prevent firms from entering the market. Such as...
Control of Raw Materials
Example: The DeBeer’s family owns most of the diamond mines in the world
Economies of Scale 5

3. Barriers to Entry (Cont.)
Patents and Copyrights
Patents - an exclusive right, granted by the government, to market a product or process for a period of time.
Copyrights - an exclusive right, granted by the government, to publish, copy or sell a piece of music, art or literature.
Other Legal Restrictions
Example:Turk Telekom, etc. 6

4. Monopoly in the Short-Run
What makes monopoly different from perfect competition is the firm’s demand curve.
Since the firm is the market, the firm’s demand curve is the market demand curve
Hence, it’s downward sloping 7

5. Monopoly in the Short Run
A profit-maximizing monopolist, then not only chooses how much to produce, but also chooses what price to charge.
What prevents a monopolist from charging an amazingly high price?
there may not be much demand at that price
So a monopolist wants to get the highest price that maximizes their profit 8

6. Monopoly and Total Revenue
Profits = Total Revenue - Total Cost
But Total Revenue is different for a monopolist than in perf. comp.
In perf. comp. the moreyou sell, the more the total revenue, but now if you sell more you have to lower your price.
Remember when we discussed elasticity, we looked at how total revenue changes as you move down a demand curve 9

7. Monopoly and Total Revenue$
Elasticity = 1
Elastic
Inelastic
Demand Q $
Total Revenue Q 10

8. Monopoly Profit
So does a monopolist want to produce at the quantity where elasticity equals 1 and total revenue is at a maximum?
Not necessarily. Remember we need to consider total cost, as well
The monopolist wants to maximize the difference between total revenue and total cost 11

9. Total Revenue and Total CostTC $ TR Q Q* 12

10. Monopoly Profit Maximization
Like perfect competition, this is the quantity where the slopes of the TC and TR curves are the same
And also like perfect competition, this is the quantity where MR=MC.
But the MR curve looks different, since the demand curve is downward sloping 13

11. D and MR 14

12. D and MR 15

13. D and MR 16

14. D and MR P
$10 8 6 4 2 D Q 1 2 3 4 5 17

15. D and MR P
$10 8 6 4 2 MR D Q 1 2 3 4 5 18

16. Profit Maximizing P
$10 MC 8 6 4 2 MR D Q 1 2 3 4 5 19

17. Profit Maximizing P
$10 MC 8 6 4 2 MR D Q 1 2 3 4 5 20

18. Profit Maximizing
So the monopolist chooses the quantity where MC=MR (a quantity of 2, in this example)
If they chose less, MR>MC so they could get more money from selling one more than it would cost to make one more.
But they also get to choose the price
They choose the highest price they can charge in order to sell Q* 21

19. Profit Maximizing P
$10 MC 8 6 4 2 MR D Q 1 2 3 4 5 22

20. Profit Maximizing
The price is found by looking to the demand curve and finding the price people are will to pay in order to buy the quantity the firm wants to produce
In the case of this example, this is a price of about $6.50
How do we show the profit in this case? 23

21. Profit Maximizing P
$10 MC
ATC 8
AVC 6 4 2 MR D Q 1 2 3 4 5 24

22. Profit Maximizing P
$10 MC
ATC 8 p*
AVC 6
atc* 4 2 MR D Q 1 2 3 4 5 25

23. Profit Maximizing Q $10 8 6 4 2 MR D 1 2 3 4 5 MC ATC AVC P Profit p*1 2 3 4 5 26

24. Shut Down Rules
A monopolist faces the same short run shut down rules as a perfectly competitive firm for all of the same reasons
As long as P>AVC, the firm is paying off some fixed cost and should stay open in the short run
If P<AVC, the firm should shut down. Just because the firm is a monopolist, does not guarantee a profit. 27

25. A Monopolist Who Should Shut Down
ATC P
$10 MC
AVC
atc* 8 p* 6 4 2 MR D Q 1 2 3 4 5 28

26. Profit Maximizing Q* - where MR = MC (profit maximization)
P* - highest P consumers are willing and able to pay for Q*
Demand curve at Q*
In the Short-Run a Monopolist may
Make Profits
Break Even
Operate at a Loss 29

27. Profit Maximizing
Note that a Monopolist always Operates on Elastic Portion of Demand Curve
Profit Maximizing - MR = MC
MC > 0 always
MR > 0 when demand is elastic 30

28. Benefits of Monopoly Technological Innovations
Incentive for monopoly profits gives firm an incentive to innovate. 38

29. Costs of Monopoly
To begin to understand the costs of monopoly, we need to introduce another concept
Producer Surplus
Producer Surplus - the revenue received by the firm above the marginal cost 39

30. Producer Surplus P MC p Q Q 40

31. Producer Surplus P MC p
The Shaded
Area is the
Producer
Surplus Q Q 41

32. Comparison of Monopoly and Perfect Competition
We can compare Monopoly and Perfect Competition by looking at the total amount of social surplus (consumer surplus plus producer surplus) generated by both and then comparing them. 42

33. Monopoly vs Perfect Comp.MC MR
PMonop
Pperf comp D Q
QMonop
Qperf comp 43

34. Monopoly vs Perfect Comp.MC MR
PMonop
Total Surplus
for Perfect
Competition
Pperf comp D Q
QMonop
Qperf comp 44

35. Monopoly vs Perfect Comp.MC MR
PMonop
Total Surplus
for Monopoly
Pperf comp D Q
QMonop
Qperf comp 45

36. Dead Weight Loss
If we take the difference between the total social surplus under perfect competition and subtract the total surplus under monopoly we find the dead weight loss
This is the loss in surplus to consumers and producers from having a monopoly 46

37. Monopoly vs Perfect Comp.MC MR
The area of this triangle
is the dead weight loss
PMonop
Pperf comp D Q
QMonop
Qperf comp 47

38. Disadvantages of Monopoly
Inefficient Allocation of Resources
Allocatively Inefficient (P > MC)
Productively Inefficient (P not = min ATC) 48