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Page 1: Pure Monopoly
Page 2: Pure Monopoly

“Pure Monopoly”

Page 3: Pure Monopoly

“PURE MONOPOLY” A market in which one

company has control over the entire market for a product, usually because of a barrier to entry such as a technology only available to that company.

Page 4: Pure Monopoly

CHARACTERISTICS OF PURE MONOPOLY

Single Seller

No Close Substitute

Price Maker

Blocked Entry

Page 5: Pure Monopoly

“ADVANTAGES

Provides incentiv

e for innovati

on.

Take advantage of

economies of scale

and scope.

Page 6: Pure Monopoly

“Disadvantages”

Limits options to consumers (and we pay a higher price).Profit and losses don’t send proper

signals or send proper incentives.

Rent seeking behavior (rent is another word for monopoly profit), spending money to obtain a monopoly

position.

Page 7: Pure Monopoly

Monopoly

• Is the sole provider• Faces a downward-

sloping demand curve• Is a price maker• Reduces price to

increase sales

Competitive Firm

• Is one of many producers

• Faces a horizontal demand curve

• Is a price taker• Sells as much or as

little at same price

HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISION

Page 8: Pure Monopoly

 

MONOPOLY DEMAND

AssumptionsPatents, economies of scale, or resource ownership secure the monopolist's status.

No unit of government regulates the firm.

The firm is a single-price monopolist; it charges the same price for all units of output.

Page 9: Pure Monopoly

Three implications of the downward-sloping demand curve

 Marginal revenue is less than price

The monopolist is a price maker

The monopolist sets prices in the elastic region of demand

Page 10: Pure Monopoly

Demand and MR for a Monopolist

P1

P2

P3

P, C

ost

Q1 Q2 Q3

Q

Tota

l R

eve

nu

e MR

TR

PED>1

PED=1

PED<1

D=AR=P

At which price/output combination will a monopolist produce?

Page 11: Pure Monopoly

OUTPUT AND PRICE DETERMINATION

Cost dataAssumption - a pure monopolist hires

resources competitively and has the same technology as a purely competitive firm.MR=MC rule

A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC.•Profit maximizing price: Find MC= MR and draw a vertical line up to the demand curve.•Draw a horizontal line. This is the price they set.

Page 12: Pure Monopoly

Pure Monopolist Earning Profits

Economic Profit

P1

ATC1

P,

Cost

MC ATC

D=AR=P

Q1 MR Q

Page 13: Pure Monopoly

No monopoly supply curve

No unique relationship between price and quantity supplied for a monopolist → no supply curve. Because the monopolist does not equate marginal cost to price, it is possible for different demand conditions to bring about different prices for the same output

Page 14: Pure Monopoly

Misconceptions concerning monopoly pricing

Not Highest PriceMisconception: Monopolists will charge highest price

possible because they can manipulate output & priceMonopolies still face consumer demand. If the price is too high, consumers won't buy their products, and profits are decreased. Although there are many prices above Pm, monopolists don't charge at those prices because they would yield a smaller-than-maximum total profit. (High prices would potentially reduce sales and total revenue too severely to offset any decrease in total cost) Monopolist seek maximum total profit, NOT the maximum price

Total, Not Unit, ProfitOutput level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.

Page 15: Pure Monopoly

Pure Monopolist Experiencing Losses

ATC1

P1

LOSSATCMC

Q1

MR

D=AR=P

P, C

ost

Q

Page 16: Pure Monopoly

 

Price Discrimination 

The practice of selling a specific product at more than one price when the price differences are not justified by cost differences.

 Ways of Price Discriminating

1. Charge each person his or her max willing-to-pay price 2. Charge more for the first set of the

product, then less for each additional product bought by the same consumer

3. Charge different customers different price based on factors such as race, gender, age, abilities etc. 

 

Page 17: Pure Monopoly

Price discrimination

Is possible when the following conditions are realized:

Monopoly PowerMarket Segregation

No ResaleLittle or No Cost Difference

Page 18: Pure Monopoly

Perfect Price Discrimination

to charge what each consumer is willing to buy. Although

perfect price discrimination is unlikely to be achieved, consumer surplus will be

reduced to zero.

Page 19: Pure Monopoly

P1

ATC1

Q1

MR

Q

ATC

MC

Economic Profit

D=AR=P

P,

Cost

ATC1

ATC

MC

MR=D=AR=P

Q1 Q

Economic ProfitP

, C

ost

Single Price Monopolist Earning ProfitsPrice Discriminating Monopolist

Page 20: Pure Monopoly

 

Price Determination

MR = MC Rule Monopolies maximize total profit by producing at a level of output where MR = MC This is the same as a purely competitive industry At this level of output, the difference between TR and TC is also at its greatest 

Page 21: Pure Monopoly

Consequences of Price Discriminating Monopolies

1. More profit2. More output3. Lowest price will = MC4. Zero consumer surplus (when

perfect)5. Creates allocative efficiency6. No productive efficiency because P>

min ATC7. MR is reunited with DARP because

the firm no longer has to decrease the price of every unit sold prior. In other words, at each quantity, the product will be sold at a different price.

 

Page 22: Pure Monopoly

GROUP 2 MEMBERSAizell Bernal

Dianne De GuzmanSheryl Tolentino

Shara Jane ClaytonJean Marie Canona

Kate GarciaJeradie Joves

Miguel AprueboPatrizia Louiz Reyes

Allan Roi Mapa