1. Definition, Causes & Pricing Chapter 15
Monopolies
Definition, Causes & Pricing
Chapter 15

2. Monopoly Market Characteristics
One Seller
Unique Product—no substitutes
Difficult/Impossible to enter or leave industry
Limited Information
Great deal of price control— Price Setters

3. WHY DO MONOPOLIES ARISE?
The fundamental cause of monopoly is Barriers to Entry
3 primary sources of barriers:
1) Ownership of a key resource
2) Government gives one firm the exclusive right to produce
3) Costs of production make a single producer more efficient

4. Natural Monopolies
natural monopoly- when a single firm can supply a good or service at a smaller cost
develop in industries with large economies of scale
Utilities:
Electricity,
Gas &
Water
Qty Produce
ATC

5. Demand Curves Competitive vs. Monopoly’
(a) Competitive Firm’s Demand Curve
(b) Monopolist’s Demand Curve
Price
Price
Demand
Demand
Quantity of Output
Quantity of Output
A Monopoly is the sole producer => therefore it faces the market demand curve

6. A Monopoly’s Revenue
When a monopoly increases the amount it sells, it has 2 affects on total revenue: (P * Qty)
1) The output effect—more output is sold, Qty
2) The price effect—price falls, P
Notice that:
P > MR

7. 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

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

9. Monopoly Profit Maximization
Costs and
Step #2: The demand
curve shows the price
consistent with this quantity.
Revenue
Step #1
Find Profit Max.
Level
MR = MC
Marginal revenue
Demand
Monopoly
price
QMAX B
Marginal
cost
Average total cost A Q Q
Quantity

10. The Monopolist’s Profit
Costs and
Revenue
Profit =
(P – ATC) * Qty
($20 - $10) * 200 =
$2,000 profit
Marginal revenue
Demand
Marginal cost
$20
Monopoly
price
QMAX B C E D
Monopoly
profit
Average total cost
$10
Average
total
cost
Quantity
200

11. Worksheet
Pure Monopoly