1. SCP Simple Monopoly Lecture 24
Dr. Jennifer P. Wissink
©2019 Jennifer P. Wissink, all rights reserved.
April 24, 2019

2. 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

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

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

5. 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.

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

7. Simple Monopoly Performance Efficiency Considerations$
Is QSM, pe? Must QSM be at the min of the lratc?
A = Yes!
B = No.
C = Maybe yes, maybe no.
lrmc=$MCsociety
PSM
Is QSM AE? Is NSS maxed? MBsoc=MCsoc?
A = Yes!
B = No.
C = Maybe yes, maybe no.
Demand=$MBsociety
Simple Monoply Dead-Weight-Loss!
QSM
QAE Q
Qmes
mrSM

8. Simple Monopoly Versus Perfect Competition
Suppose we start with a market that is perfectly competitive and has 50 independent firms operating in the market for fedoras.
I'm gonna make him
an offer he can't refuse
Suppose one day Vito Corleone manages to buy out all 50 firms simultaneously and creates the monopoly, Fantastic Fedoras.
Suppose nothing changes in the nature of the cost structures once the monopoly is set up.
If this is the case, then the monopoly (multi-plant) marginal cost curve will look exactly like the former market short run supply curve.
Note: The advantage to having a monopoly in this story is that is allows the monopolist (Vito) to totally control the number of hats that get put on the market for sale. Under conditions of perfect competition no one has any individual market power, so they all act as 50 independent price taking firms.
Let’s compare the before and after.

9. Perfect Competition (PC) vs Simple Monopoly (SM)
Before (PC)
After (SM)
Price
Quantity
Consumers' Surplus
Producers’ Surplus
Net Social Surplus
MCsoc
mcSM
SRS
MBsoc
Demand
mrSM

10. So: Are Monopolies Good? Bad? Ugly?
Your Opinion
A = Good!
B = Bad.
My Advice, It Depends....
What kind of monopoly is it?
From whose point of view are we asking?
How did the monopoly position come about?
How is the monopoly position maintained?
How does the monopoly behave?

11. So: Should the Government Regulate Monopolies?
Essentially all monopolies are regulated, in some way or another.
Natural monopolies are regulated by price commissions that determine the rates the monopolies may charge.
Patent, copyright and license protections are a form of ex ante regulation: firms that follow the rules for establishing the validity of their innovations receive the protection of the patent, copyright or license.
Should the government do more? Good question.

12. Ways the Government Can Regulate Monopolies – DO/KNOW THESE!
How about a per unit tax on the output of the monopolist? What would that do?
How about a per unit subsidy on the output of the monopolist? What would that do?
How about a tax on the economic profit of the monopolist? What would that do?
How about a binding price ceiling on the monopolist? What would that do?
How about breaking up the monopoly? What would that do?
How about taking away the patent? What would that do?

13. Placing a Per Unit Tax on the Simple Monopolist’s Outputmc
PSM
Demand
QSM
mrSM

14. Placing a Price Ceiling on the Simple Monopolistmc
PSM
Demand
QSM
mrSM