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Monopoly
PRINCIPLES OF
MICROECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint Slides by Ron Cronovich
2007 Thomson South-Western, all rights reserved
Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect societys well-being? What can the government do about monopolies? What is price discrimination?
CHAPTER 15
MONOPOLY
Introduction
A monopoly is a firm that is the sole seller of a
product without close substitutes.
CHAPTER 15
MONOPOLY
Cost
Electricity
Economies of scale due to huge FC
Q
5
D Q
CHAPTER 15 MONOPOLY 6
1: A monopoly s revenue
ACTIVE LEARNING Moonbucks is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. What is the relation between P and AR? Between P and MR?
Q 0 1 2 3 4 5 6 P $4.50 4.00 3.50 3.00 2.50 2.00 1.50
7
TR
AR n.a.
MR
ACTIVE LEARNING
1:
Answers
Here, P = AR, same as for a competitive firm. Here, MR < P, whereas MR = P for a competitive firm.
Q 0 1 2 3 4 5 6 P $4.50 4.00 3.50 3.00 2.50 2.00 1.50 TR $0 4 7 9 10 10 9 AR n.a. $4.00 3 3.50 2 3.00 1 2.50 0 2.00 1 1.50
8
MR $4
MR
Q
9
MONOPOLY
Profit-Maximization
Like a competitive firm, a monopolist maximizes
profit by producing the quantity where MR = MC.
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MONOPOLY
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Profit-Maximization
Costs and Revenue
1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q.
MC
D MR
Quantity
Profit-maximizing output
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MC ATC
P ATC
D MR
Quantity
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MONOPOLY
13
PM
D MR Quantity
In the monopoly eqm, P > MR = MC The value to buyers of an additional unit (P)
exceeds the cost of the resources needed to produce that unit (MC). The monopoly Q is too low could increase total surplus with a larger Q. Thus, monopoly results in a deadweight loss.
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MONOPOLY
16
P P = MC MC
D MR
QM QE
Quantity
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MONOPOLY
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Examples:
Sherman Antitrust Act (1890), Clayton Act (1914) Antitrust laws ban certain anticompetitive practices, allow govt to break up monopolies.
Regulation
Govt agencies set the monopolists price For natural monopolies, MC < ATC at all Q,
so marginal cost pricing would result in losses. If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit.
MONOPOLY 18
CHAPTER 15
Public ownership
Doing nothing
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MONOPOLY
19
Price Discrimination
Discrimination is the practice of treating people
differently based on some characteristic, such as race or gender.
PM MC
Monopoly profit
D MR
QM
CHAPTER 15 MONOPOLY
Quantity
21
Price
Monopoly profit
MC
D MR Quantity
Q
22
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MONOPOLY
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MONOPOLY
25
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MONOPOLY
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In the real world, pure monopoly is rare. Yet, many firms have market power, due to selling a unique variety of a product having a large market share and few significant
competitors
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MONOPOLY
28
CHAPTER SUMMARY Monopoly firms (and others with market power) try
to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination.
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MONOPOLY
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