1. 1 © 2010 South-Western, a part of Cengage Learning Chapter 9 Monopoly Microeconomics for Today Irvin B. Tucker

2. © 2010 South-Western, a part of Cengage Learning 2 What will I learn in this chapter? How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss

3. © 2010 South-Western, a part of Cengage Learning 3 What is a monopoly? Single seller Single seller Unique product Unique product Impossible entry into the market Impossible entry into the market

4. © 2010 South-Western, a part of Cengage Learning 4 What are the most common monopolies? Local monopolies are more common real-world approximations of the model than national or world market monopolies Local monopolies are more common real-world approximations of the model than national or world market monopolies

5. © 2010 South-Western, a part of Cengage Learning 5 What does it mean to have a unique product? There are no close substitutes for the monopolist’s product There are no close substitutes for the monopolist’s product

6. © 2010 South-Western, a part of Cengage Learning 6 What are some examples of impossible entry? Owner of a vital resource Owner of a vital resource Legal barriers Legal barriers Economies of scale Economies of scale

7. © 2010 South-Western, a part of Cengage Learning 7 What is the advantage of economies of scale? Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms

8. © 2010 South-Western, a part of Cengage Learning 8 What is a natural monopoly? An industry in which the long-run average cost of production declines throughout the entire market An industry in which the long-run average cost of production declines throughout the entire market

9. © 2010 South-Western, a part of Cengage Learning 9 What is unique about a natural monopoly? A single firm will produce output at a lower per-unit cost than two or more firms in the industry A single firm will produce output at a lower per-unit cost than two or more firms in the industry

10. © 2010 South-Western, a part of Cengage Learning 10 What is a price maker? A firm that faces a downward-sloping demand curve A firm that faces a downward-sloping demand curve

11. © 2010 South-Western, a part of Cengage Learning 11 What is the difference between monopoly and perfect competition? The D and MR curves of the monopolist are downward sloping; in perfect competition they are horizontal The D and MR curves of the monopolist are downward sloping; in perfect competition they are horizontal

12. © 2010 South-Western, a part of Cengage Learning 12 What is unique about the demand curve for a monopolist? The monopolist demand curve and the industry demand curve are one in the same The monopolist demand curve and the industry demand curve are one in the same

13. © 2010 South-Western, a part of Cengage Learning 13 40 20 15 10 5 20 30 35 40 6080 100 Minimizing Costs in a Natural Monopoly Cost per Unit (dollars) 251 firm 2 firms 5 firms Quantity of Output

14. © 2010 South-Western, a part of Cengage Learning 14 What determines price for a monopolist? Demand Demand

15. © 2010 South-Western, a part of Cengage Learning 15 Why is MR < P for all but the first unit of output? To sell additional units, the price has to be lowered; this price-cut applies to all units, not just the last unit To sell additional units, the price has to be lowered; this price-cut applies to all units, not just the last unit

16. © 2010 South-Western, a part of Cengage Learning 16 8 $-50 $-100 $-150 $-200 246 0 $50 $100 $150 1012141618 Monopoly D emand Marginal R evenue Q Price & Marginal Revenue

17. © 2010 South-Western, a part of Cengage Learning 17 8 $200 $100 24 6 $300 $400 1012141618 Monopoly Q Total Revenue

18. © 2010 South-Western, a part of Cengage Learning 18 Where does a monopolist produce to maximize profit or minimize losses? MR = MC

19. © 2010 South-Western, a part of Cengage Learning 19 $100 $75 $50 $25 123 4 $125 $150 $175 $200 56789 ATC MC MR=MC D MR Profit AVC Q P

20. © 2010 South-Western, a part of Cengage Learning 20 $100 $75 $50 $25 123 4 $125 $150 $175 $200 56789 ATC MC MR=MC D MR Loss AVC P Q

21. © 2010 South-Western, a part of Cengage Learning 21 Can a monopolist make a profit in the long-run? If the positions of a monopolist’s demand and cost curves give it a profit and nothing disturbs these curves, it can make a profit in the long-run If the positions of a monopolist’s demand and cost curves give it a profit and nothing disturbs these curves, it can make a profit in the long-run

22. © 2010 South-Western, a part of Cengage Learning 22 What is price discrimination? The practice of a seller charging different prices for the same product not justified by cost differences The practice of a seller charging different prices for the same product not justified by cost differences

23. © 2010 South-Western, a part of Cengage Learning 23 What is arbitrage? The practice of earning a profit by buying a good at a low price and reselling the good at a higher price The practice of earning a profit by buying a good at a low price and reselling the good at a higher price

24. © 2010 South-Western, a part of Cengage Learning 24 Q1Q1 MC MR=MC D MR T1T1 - Price Discrimination - Market for average students P Q

25. © 2010 South-Western, a part of Cengage Learning 25 Q2Q2 MC MR=MC D MR T2T2 P Q - Price Discrimination - Market for superior students

26. © 2010 South-Western, a part of Cengage Learning 26 Is price discrimination unfair? Many buyers benefit from the discrimination by not being excluded from purchasing the product Many buyers benefit from the discrimination by not being excluded from purchasing the product

27. © 2010 South-Western, a part of Cengage Learning 27 Is monopoly efficient? A monopolist is inefficient because resources are underallocated to the production of its product A monopolist is inefficient because resources are underallocated to the production of its product

28. © 2010 South-Western, a part of Cengage Learning 28 Is perfect competition efficient? A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources

29. © 2010 South-Western, a part of Cengage Learning 29 QcQc MCMR=MC PcPc Perfect Competition MR, D P Q

30. © 2010 South-Western, a part of Cengage Learning 30 QmQm MC MR=MC D MR PmPm Monopolist P Q

31. © 2010 South-Western, a part of Cengage Learning 31 How does monopoly harm consumers? It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation

32. © 2010 South-Western, a part of Cengage Learning 32 QmQm  MC MR=MC D PmPm Impact of Monopolizing and Industry P Q PcPc QcQc MR

33. © 2010 South-Western, a part of Cengage Learning 33 What is the case against monopoly? Higher price Higher price Charges a Price > MC Charges a Price > MC Long-run economic profit Long-run economic profit Alters the distribution of income to favor monopolist Alters the distribution of income to favor monopolist

34. © 2010 South-Western, a part of Cengage Learning 34 END