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Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Imperfect Competition

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Imperfect Competition

• Opening Question– In your notebook, brainstorm:THREE similarities and two

differences between:

a) The way MONOPOLY works

andb) The way the US economy works

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Market Structures:Sellers (top), and Buyers (bottom)

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Defining Imperfect Competition

IMPERFECT COMPETITION

Monopolistic Competition

Oligopoly

Monopoly

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Defining Monopoly

MONOPOLY (noun) • Plural: monopolies

– Etymology:• Latin monopolium, from Greek

monopōlion, from mon- (one) + pōleo (to sell or to barter)

– First recorded use (1534)

– Definition:• A pure monopoly is an industry with

exactly ONE firm that produces the market’s entire quantity supplied

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Preview:Pure Monopoly (Graph)

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Characteristics of aPure Monopoly

Single SellerAsymmetric InformationNo Close SubstitutesTotal Control over Price (“Price-

Maker” not a “Price-taker”)Avoids Competition through Barriers

to Entry

[Remember that Santa is a monopolist]

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Barriers to Entry• Legal Barriers

• Patents, Licenses, Copyrights, Trademarks, …

• Economies of Scale• Keeps competition out, since the per unit

cost for small companies are much higher than the larger, established monopolist.

• Control of Key Resource• Can keep competitors from producing

• Network Superiority• If the value to consumers increases as more

people use it (ie. Microsoft Office programs… in terms of compatibility and familiarity)

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Terms

• Natural Monopoly• An industry that runs most efficiently

as a monopoly________________________________________

• Regulated Monopoly• When government places regulations

upon the monopolist (sets price limits or output quotas)

• Unregulated Monopoly• A monopolist free from government

regulation. If unregulated, The firm will set the price that will maximize PROFITS

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Imperfect Competition:What Stays the Same??

• The graph for IMPERFECT COMPETITION looks a bit different than Perfect Competition - but many of the rules are still true.

• These rules still apply for all market structures:

• Profit-Maximization still occurs at MR=MC

• All of our Cost Curves still look & function the same (MC, ATC, AVC, …)

• D=AR=P (but no more MR. DARP :(

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

MR < D=AR=P… but why?

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Why does the D=AR=P curve slope downward?

• The Firm IS the Market• The market demand curve IS the

firm’s demand curve• There are no alternatives to a pure

monopoly.• If the monopolist raises the price,

quantity sold declines (at market & firm [same])

• The Monopolist can set the price OR the output, but not both.

• The Consumers will respond to whatever the Monopolist sets.

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Why is MR below D=AR=P??• Copy this table, graph the demand

curve, then figure TR and MR.

Q P

0 14

1 12

2 10

3 8

4 6

5 4

TR

0

12

20

24

24

20

MR

--

12

8

4

0

-4

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Why is MR below D=AR=P??

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Monopolist operates in the ELASTIC part of the curve

• An advanced concept:– When MR=0, TR is maximized.– This is the point where Demand is

UNIT ELASTIC.– Monopolists will always produce less

than this (in elastic part of the curve)

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Monopolist operates in the ELASTIC part of the curve

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:SR PROFIT-MAXIMIZATION• The monopolist expands

production until MR=MC• At this output level, the demand

curve determines the price that must be charged for consumers to purchase that quantity.

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:SR PROFIT-MAXIMIZATION• RULES FOR BREAKEVEN &

SHUTDOWN– It’s easy - they stay the same…

• If P > ATC == + Ec. Profits• If ATC > P >AVC == Neg. Ec.

Profits• If AVC > P == Firm will shut

down production

• Breakeven point: P=ATC• Shutdown point: P=AVC

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:in the Long Run

• In the short-run, a monopoly can make profits or losses.

• In the long-run, the monopolist can still earn positive economic profits… and typically will.

• But the Monopoly WILL go out of business if it cannot earn a normal profit in the long-run.

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Comparing Monopoly to Perfect Competition

• Compared to a firm in Perfect Competition… A monopolist produces a smaller quantity, charges a higher price, and can earn a positive economic profit (in Short-Run and Long-Run)

• Compared to a firm in Perfect Competition… A monopolist produces a smaller quantity, charges a higher price, and can earn a positive economic profit (in Short-Run and Long-Run)

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:Steps to creating the graph

1. Draw axes, label P & Q2. Draw D=AR=P, then MR [MR bisects]

3. Draw MC (nike)4. Draw ATC & AVC (location will

depend on info. Given whether making profit/loss/norm. profit)

5. Draw vertical dotted line through MR=MC (profit-max)

6. Label:• Qm == Q where MR=MC• Pm == D=AR=P at Quantity Qm

• ATC == ATC at Quantity Qm

• PROFIT or LOSS box (clearly)

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:Create your Own Graph

1. Keeping these steps in mind, draw your own MONOPOLY graph in your notebook.

2. When done, determine if this monopoly is earning:

• Positive economic profit• Normal profit• Negative economic profit (loss)• Shutting down

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:Working with the Graph

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Pure Monopoly:Working with the Graph

• Identify:(a) Profit, (b) C.S., (c) DWL

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

Characteristics of a Monopoly

D=AR=P > MR

Monopoly Profit Maximization

Comparing Monopoly to

Perfect Competition

Monopoly: Inefficient??

Price Discrimination

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