2. 1. One Seller 2. One Product 4. Non-Price competition 6. Price Maker (to maximize profits) 3. Blocked Entry (and exit?) 5. LR profits/losses

3. Barriers to Entry 1.Natural monopoly 2.Control of a physical resource 3.Legal Monopoly 4.Patents, trademarks, and copyrights 5.Intimidating potential competitors

4. Barrier to EntryGovernment Role Example Natural MonopolyRegulated or owned Water and electric cos. Control of a physical resource NoDeBeers and ALCOA Legal MonopolyYesPost Office Patents, copyrights, and trademarks Protection of Intellectual Properties New drugs or software Intimidating potential competitors Somewhat?Predatory pricing

5. 1.Natural Monopoly – a. Economies of Scale can combine with the size of the market to limit competition. 2 Types of Monopolies When the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. -water lines. -electrical service

6. Natural Monopoly in Aircraft Manufacturing In this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.

7. b. Controlling a Physical Resource when a company has control of a scarce physical resource. When the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. -ALCOA (bauxite and aluminum). -DeBeers (diamonds)

8. 2. Legal Monopoly – a.Post Office and Utilities -the government allows producers to become regulated monopolies, to insure that an appropriate amount of these products is provided to consumers

9. b. To protect Intellectual Properties -patents (for inventions) -trademarks (for names) -copyrights (for literature)

10. © 2013 Pearson Education, Inc. Publishing as Prentice Hall The Demand Curve for a Monopoly If a Monopolist increases prices, it will lose some, but many, of its customers. Therefore, unlike a perfect competitor, a Monopoly faces a downward-sloping demand curve. d Price Quantity/time P2P2 P1P1 q1q1 q2q2

11. Price and Output A monopolistic firm will expand output as long as marginal revenue exceeds marginal cost. Price will be lowered and output expanded until MR = MC The price charged by the firm will be greater than its marginal cost.

12. d Price Quantity/time P2P2 P1P1 MR q1q1 q2q2 Increase in Total Revenue Reduction in Total Revenue Marginal Revenue in Monopoly Initial price P 1 & output q 1. Total revenue (TR) = P 1 * q 1. 1. As price falls from P 1 to P 2, output increases from q 1 to q 2, two conflicting influences on TR. 1. TR will rise because of an increase in the number of units sold (q 2 - q 1 ) * P 2. 2. TR will decline [(P 1 - P 2 ) * q 1 ] as q 1 units once sold at the higher price (P 1 ) are now sold at the lower price (P 2 ). Depending on the size of the shaded regions, total revenue may increase or decrease.

13. Price Quantity/time d P MR q MC ATC C B A with price determined by the height of the demand curve at that level of output, P. Price and Output Under Monopoly Expand output as long as MR > MC. (P goes down) MR > MC MR < MC Output level q will result … At q the average total cost per unit for that scale of output is C. As P > C (price > ATC) the firm is making economic profits equal to the area PABC. Economic profits

14. d MR MC LRATC Price Quantity/time The diagram shows demand and long-run cost conditions in an industry a.Explain why the industry is likely to be monopolized. b.Indicate the monopolist’s output level, and label it Q. c.Indicate the price that a profit-maximizing monopolist would charge, and label it P d.Indicate the maximum profits of the monopolist. e. Will the profits attract competitors to the industry? Yes ___ No ____ Explain why or why not Q P X

15. 0 ---- Total revenue = (1)*(2) (3) Price (per unit) (2) Output (per day) (1) 1 $25.00 2 3 4 5 6 7 8 9 10 ----- $50.00 Total costs (per day) (4) Profit = (3) - (4) (5) Marginal cost (6) Marginal revenue (7) $24.00 $23.00 $22.00 $21.00 $19.75 $18.50 $17.25 $16.00 $14.75 $25.00 $48.00 $69.00 $88.00 $105.00 $118.50 $129.50 $138.00 $144.00 $147.50 $60.00 $69.00 $77.00 $84.00 $90.50 $96.75 $102.75 $108.50 $114.75 $121.25 -$35.00 -$21.00 -$8.00 $4.00 $14.50 $21.75 $26.75 $29.50 $29.25 $26.25 -$50.00 ---- $10.00$25.00 $9.00$23.00 $8.00$21.00 $7.00$19.00 $6.50$17.00 $6.25$13.50 $6.00$11.00 $5.75$8.50 $6.25$6.00 $6.50$3.50 ---- < < < < < < < < Maximum profits A monopolist will reduce price and expand output as long as MR > MC. Price and Output Under Monopoly As the monopolist reduces price and expands output, profits increase … until the point where MC > MR. Here an output of 8 a day will maximize profits.

16. 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 Number of Cakes

17. Profits Under Monopoly High entry barriers protect monopolists from competitive pressures. –Monopolists can earn long-run profits. However even a monopolist will not always be able to earn profit. –When ATC is always above the demand curve, the monopolist will be unable to cover costs (unable to earn a profit).

18. A monopolist will set output equal to q, where MR = MC When a Monopolist Incurs Losses d P MR q MC ATC C A B Price Quantity/time Short-run losses At this level of output, the price that the monopolist charges does not cover the average total cost of producing the output ( P < C ). Whenever the ATC curve lies always above the demand curve, the monopolist will incur short-run losses. In this diagram the firm is making economic losses equal to the shaded area, CABP.

19. In perfectly competitive, price and quantity are determined by the intersection of the demand and supply curves. In a monopoly, the industry supply curve becomes the monopolist’s marginal cost curve. The monopolist reduces output to where marginal revenue equals marginal cost, Q M, and the monopolist raises the price from P C to P M. Comparing Monopoly and Perfect Competition

20. A monopoly charges a higher price, P M vs P C and produces a smaller quantity, Q M vs Q C The higher price reduces consumer surplus by the area equal to the rectangle A and the triangle B. Some of the reduction in consumer surplus is captured by the monopoly as producer surplus, and some becomes deadweight loss, which is the area equal to triangles B and C. The Inefficiency of Monopoly

21. D P0P0 MR Q0Q0 LRATC MC P1P1 P2P2 Q1Q1 Q2Q2 Regulation of a Monopolist Price Quantity/time An unregulated monopolist produces where MR = MC (Q 0 ) and charge price P 0. From an efficiency viewpoint, this output is too small and the price is too high. 1.average cost pricing The monopolist is forced to reduce its price to P 1 the expand output to Q 1. 2. marginal cost pricing -Force output to be expanded to Q 2 where P = MC - P = cost to produce -Forces LR losses. Average cost pricing Marginal cost pricing

22. When economies of scale are important and an industry tends toward natural monopoly, splitting the industry into small, rival firms will a. lead to lower prices in the short run. b. cause prices to rise when demand is inelastic but fall when it is elastic. c. cause prices to fall because of the decline in producer profits. d. increase per-unit costs of production. A monopolist will maximize profits by a. setting his price as high as possible. b. setting his price at the level that will maximize per-unit profit. c.producing the output where marginal revenue equals marginal cost and charging the price on the demand curve at that quantity. d.producing the output where price equals marginal cost. Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? a. The output of the monopolist will be too large and its price too high. b. The output of the monopolist will be too large and its price too low. c. The output of the monopolist will be too small and its price too high. d. The output of the monopolist will be too small and its price too low.

23. Which of the following is the most accurate description of a monopolist? a.a firm that produces a single product b.a firm that is the sole producer of a narrowly defined product class, such as yellow, grade-A butter produced in Jackson County, Wisconsin c.a firm that is the sole producer of a product for which there are no good substitutes in a market with high barriers to entry d.a firm that is large relative to its competitors When natural monopoly is present in an industry, the per-unit costs of production will be a.lowest when there are large number of producers in the industry. b.lower for small firms than for large firms c.lowest when a single firm generates the entire output of the industry d.minimized at the output that maximizes the industry’s profitability

24. What price and output in the graph would an unregulated profit- maximizing monopolist choose? a. price C and output R b. price B and output R c.price B and output S d.price A and output T If a regulatory agency were using the “normal return” (zero economic profit) criteria to impose a price on a monopolist with the cost and demand conditions depicted, what price would the regulators set, and what output would the monopolist produce? a.price A and output T b.price C and output R c.price B and output R d. price B and output S Would they be making a profit? a. yes b. no c.normal but not economic d.can’t tell