1. Review pages
1. Explain what it means to say that the monopolist is a “price maker.”
2. Explain the relationship between output and price for the monopolist.
3. Explain why the monopolist has no supply curve.
4. Draw a graph of a monopoly like the one on page Include all the curves shown on figure Use your graph to answer the following questions:
a. Identify the monopolist’s profit-maximizing price and level of output on your graph.
b. Shade in and label the area of economic profit (or loss) on your graph.
c. If the monopolist’s marginal cost decreases, how will price and quantity be affected? Show this on your graph.

2. Chapter 12 – Pure Monopoly
What are the characteristics of Pure Monopoly?
Single seller
No close substitutes
Blocked entry

3. Chapter 12 – Pure Monopoly
What are the market conditions that create a Pure Monopoly?
Barriers to Entry:
Economies of Scale
Patents and licenses
Others on p. 257

4. A monopoly is a price maker.
What does this mean?
Because the firm is the entire industry, it decides output levels for the entire market.
It then sets price based on market demand for the product at that level of output.
Price P1 P2 D
The demand curve, for the monopoly is downward sloping. Q1 Q2
Quantity

5. Marginal Revenue and Price
In monopoly, price and marginal revenue are not the same.
This is because of the monopoly’s downward-sloping demand curve.
To increase output, the monopolist must lower price, not just for the next unit, but for all units.

6. Marginal Revenue and Price
Example: if the monopolist could sell 10 units at $100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit?
10 x 100 = $1000
11 x 99 = $1089
Total revenue goes up by $89, so marginal revenue is $89, not the $99 price.

7. For a monopoly, marginal revenue is always less than price.
Demand
Marginal Revenue
Quantity

8. How does a monopolist maximize profit? Set output where MR = MC.
Price MC D MR QM
Quantity

9. Follow the quantity where MR = MC up to the demand curve.
What price does the monopolist charge?
Follow the quantity where MR = MC up to the demand curve.
Price MC PM D MR QM
Quantity

10. Notice the inefficiency in a monopoly:
Output is less than where MC = Demand (MB to consumers)
Price is greater than marginal cost.
Price MC PM D MR QM
Quantity

11. What is the area of profit or loss for the monopolist?
Price MC
ATC PM
Profit D MR QM
Quantity

12. Does the monopolist always make a profit?
Price MC
ATC PM
Loss D MR QM
Quantity

13. And finally, what happens to output when a monopoly’s costs change?MC
Price
ATC PM P2 D MR QM Q2
Quantity

14. For the profit-maximizing monopolist, identify:
Output b. Price c. Total Profit
d. Socially optimal (allocatively efficient) output
e. Socially optimal (efficient) price at profit-maximizing output.

15. End Part 1

16. Price Discrimination Price($) MC ATC PM Demand Marginal Revenue QM
Consumer Surplus
ATC PM
Producer Surplus
Deadweight Loss
Demand
Marginal Revenue QM
QUANTITY

17. Price Discrimination Conditions: A. Monopoly power.
B. Market segregation: separate your customers into groups based on how much they’re willing to pay.
C. No resale (customers cannot re-sell their purchase to someone else at the higher price).
II. Results:
A. Firm can charge each customer as much as they are willing to pay.
B. Increases profit and output.
C. Decreases consumer surplus (perfect price discrimination completely eliminates consumer surplus).

18. Price Discrimination Price($) Examples? MC ATC PM PD Demand
Marginal Revenue QM QD
QUANTITY

19. Perfect Price Discrimination
Examples?
Total Revenue is the whole shaded area.
Price($) MC
ATC PM
Demand
Marginal Revenue QM QD
QUANTITY

20. Perfect Price DiscriminationMC
ATC PM PD
Demand
Marginal Revenue QM QD
QUANTITY

21. Price Discrimination Price($) MC ATC PM Demand Marginal Revenue QM
Consumer Surplus
ATC PM
Demand
Marginal Revenue QM
QUANTITY