MonopolyOpposite of PCOccurs when output of entire
industry is produced and sold by a single firm referred to as Monopolist
Characteristics of Pure Monopoly
Single supplier – the firm and the industry are the same.
No close substitutes – the product is unique and unlike any others.
Price maker – the firm has considerable control over price since it controls the total quantity supplied.
Blocked entry – barriers to entry exist because there is no immediate competition.
Example railways in Pakistan , PTCL was once a monopoly
Barriers to EntryEconomies of ScaleLegal Barriers to Entry
◦Patents[ gives right to a firm to produce a product for a given time period]
◦Licenses[ govt gives licenses e.g. TV channels]
Ownership or Control of Essential Resources [e.g. gas reserves]
Price Maker
Monopoly Price-Setting Strategies◦ For a monopoly firm to determine the quantity
it sells, it must choose the appropriate price. ◦ There are two types of monopoly price-setting
strategies:◦ A single-price monopoly is a firm that must
sell each unit of its output for the same price to all its customers.
◦ Price discrimination is the practice of selling different units of a good or service for different prices.
A single price Monopolist
Cost and Demand curveThe cost curves[ AVC, ATC] of
monopolist are U shaped just like PC firms, because cost depend on law of DR not market structure
Monopoly firm is sole the supplier so it faces downward sloping demand, tradeoff between D and P
A single price MonopolistAverage RevenueWhen monopoly charges same price
over all units sold, AR is identical to price.
The market demand curve is also firm AR curve
AR= TR/Q= [P x Q]/Q so Q cancels out and
hence AR= P for single price monopoly
A single price MonopolistPrice and Marginal Revenue
◦MR from sale of additional unit of production will be below demand curve
◦Since the demand curve is negatively sloped hence the prices must be lowered on all units to sell an extra unit.
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
Gain = $132
Loss = $30
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
• $102 Becomes a Point on the MR Curve
• Try Other Prices toDetermine Other MR Points
Gain = $132
Loss = $30
The Constructed Marginal Revenue CurveMust Always Be Less Than the Price
MR
Total, Average and Marginal Revenue
PriceP=AR
Quantity Total RevenueTR= T x Q
Marginal Revenues
9.1 9 81.9
9 10 90 8.1
8.9 11 97.9 7.9
Price elasticity and MRAs noted earlier, since the
demand curve facing a monopoly firms is downward sloping, MR < P
MR > 0 when demand is elasticMR = 0 when demand is unit
elasticMR < 0 when demand is inelastic
$200
150
100
50
0
$750
500
250
0
2 4 6 8 10 12 14 16 18
2 4 6 8 10 12 14 16 18
Pri
ce
Tota
l R
even
ue
Monopoly Revenue and CostsDemand, Marginal Revenue, and Total Revenue for a
Pure MonopolistElastic Inelastic
Demand and Marginal Revenue Curves
Total-Revenue Curve
DMR
TR
SR Monopoly equilibrium Two rules apply 1. Produce or Not [ if monopolist
cannot cover SR variable costs then shut down]
2. If the firm does produce then MC = MR, the monopolist is maximizing profit.
MC= MRBecause MR< P for a monopoly
then MR=MC< PWhen monopoly firm is in profit
maximizing equilibrium ,its MC is always less than price it charges.
MR = MC Determines the Profit-Maximizing Output**Elasticity and revenues Monopolist always produce where
demand is elastic , MR is positiveA profit maximizing monopoly will
never sell in the range where demand is inelastic
Profit Maximization
0
$200
175
150
125
25
100
75
50Pri
ce,
Costs
, an
d R
even
ue
1 2 3 4 5 6 7 8 9 10
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Pm=$122
A=$94
EconomicProfit
Loss Minimization
0
Pri
ce,
Costs
, an
d R
even
ue
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
Economic Effects of MonopolyPrice, Output, and Efficiency
PurelyCompetitive
Market
PureMonopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure Competition is EfficientMonopoly Price is Greater Than MC
And Is Therefore Inefficient
a
b
c
Supply for monopolyWe are not equating p=MR= MC
like we did in PCFor a monopoly firm there is no
unique relationship between markept price and quantity supplied
Figure 13.5
Multi-plant monopolistHow to allocate production
between two or more plants?The given output will be allocated
where the MC of plants equatePlant A MC=20 producing 30unitsPlant B MC=17 producing 25
unitsCost reduce by 3 if you reallocate