1. CH13 : MONOPOLY Asst. Prof. Dr. Serdar AYAN

2. Causes of Monopoly Legal restrictions Patents
Control of a scarce resources
Deliberately-erected entry barriers.
- Technical superiority
- Economies of scale

3. Forms of Imperfect Competition and Market Boundaries
pure monopoly An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.
natural monopoly An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient.
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4. Monopoly: Why?
Natural monopoly (increasing returns to scale), e.g. utility companies
Pure monopoly
a patent; e.g. a new drug
sole ownership of a resource; e.g. a toll bridge
formation of a cartel

5. Monopoly: Assumptions
Many buyers
Only one seller i.e. not a price-taker
(Homogeneous product ~ no close substitute)
Perfect knowledge
Restricted entry (and possibly exit)

6. Monopoly: Features
The monopolist’s demand curve is the (downward sloping) market demand curve
The monopolist can alter the market price by adjusting its output level.

7. Monopoly: Market Behaviour
p(y)
Higher output y causes a lower market price, p(y). D
y = Q

8. Monopoly: Market Behaviour
At the profit-maximizing output level, the slopes of the total revenue and total cost curves are equal, i.e.
MR = MC

9. Monopoly: Market Behaviour
Suppose that the monopolist seeks to maximize economic profit
What output level maximizes profit?

10. TABLE 13.1 Marginal Revenue Facing a Monopolist
(1) Quantity
(2) Price
(3) Total Revenue
(4) Marginal Revenue - 1 10
$10 2 9 18 8 3 24 6 4 7 28 5 30 -2 -4 -6 -8

11. Monopoly: Equilibrium
Demand
y = Q MR

12. Monopoly: EquilibriumMC P y
Demand MR

13. Monopoly: EquilibriumMC P
ATC y
Demand AR MR

14. Monopoly: EquilibriumMC
Output Decision
MC = MR P
ATC ym y
Demand MR

15. Monopoly: EquilibriumMC
Pm = the price P
ATC Pm ym y
Demand MR

16. Monopoly: EquilibriumMC
The shaded area is the excess profit P
ATC Pm ym y
Demand MR

17. Price and Output Decisions in Pure Monopoly Markets
The Monopolist’s Profit-Maximizing Price and Output
 FIGURE Price and Output Choice for a Profit-Maximizing Monopolist
A profit-maximizing monopolist will raise output as long as marginal revenue exceeds marginal cost. Maximum profit is at an output of 4,000 units per period and a price of $4. Above 4,000 units of output, marginal cost is greater than marginal revenue; increasing output beyond 4,000 units would reduce profit. At 4,000 units, TR = PmAQm0, TC = CBQm0, and profit = PmABC.
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