2 Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker.
3 Monopoly u A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes.
4 Why Monopolies Arise The fundamental cause of monopoly is barriers to entry.
5 Why Monopolies Arise Barriers to entry have three sources: u Ownership of a key resource. u The government gives a single firm the exclusive right to produce some good. u Costs of production make a single producer more efficient than a large number of producers.
6 Monopoly Resources Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.
7 Government-Created Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.
8 Government-Created Monopolies Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.
9 Natural Monopolies An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
10 Natural Monopolies A natural monopoly arises when there are economies of scale over the relevant range of output.
11 Cost Economies of Scale as a Cause of Monopoly... Average total cost 0 Quantity of Output
12 Monopoly versus Competition Monopoly u Is the sole producer u Has a downward-sloping demand curve u Is a price maker u Reduces price to increase sales
13 Competition versus Monopoly Competitive Firm u Is one of many producers u Has a horizontal demand curve u Is a price taker u Sells as much or as little at same price
14 Demand Curves for Competitive and Monopoly Firms... Price (a) A Competitive Firm s Demand Curve Price (b) A Monopolist s Demand Curve Demand Demand 0 Quantity of Output 0 Quantity of Output
15 A Monopoly s Revenue u Total Revenue P x Q = TR u Average Revenue TR/Q = AR = P u Marginal Revenue DTR/DQ = MR
17 A Monopoly s Marginal Revenue A monopolist s marginal revenue is always less than the price of its good. u The demand curve is downward sloping. u When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.
18 A Monopoly s Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q). u The output effect more output is sold, so Q is higher. u The price effect price falls, so P is lower.
19 Demand and Marginal Revenue Curves for a Monopoly... Price $ Marginal revenue Demand (average revenue) Quantity of Water
20 Profit Maximization of a Monopoly u A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. u It then uses the demand curve to find the price that will induce consumers to buy that quantity.
21 Profit-Maximization for a Monopoly... Costs and Revenue Monopoly price 2....and then the demand curve shows the price consistent with this quantity. B A 1. The intersection of the marginal-revenue curve and the marginalcost curve determines the profit-maximizing quantity... Average total cost Marginal cost Demand 0 Q MAX Marginal revenue Quantity
22 Comparing Monopoly and Competition u For a competitive firm, price equals marginal cost. P = MC u For a monopoly firm, price exceeds marginal cost. MR = MC
23 A Monopoly s Profit Profit equals total revenue minus total costs. Profit = TR - TC Profit = (TR/Q - TC/Q) x Q Profit = (P - ATC) x Q
24 The Monopolist s Profit... Costs and Revenue Monopoly price E B Marginal cost Average total cost Average total cost D C Demand 0 Q MAX Marginal revenue Quantity
25 The Monopolist s Profit The monopolist will receive economic profits as long as price is greater than average total cost.
26 The Market for Drugs... Costs and Revenue Price during patent life Price after patent expires Marginal revenue Demand Marginal cost 0 Monopoly Competitive Quantity quantity quantity
27 The Welfare Cost of Monopoly uin contrast to a competitive firm, the monopoly charges a price above the marginal cost. u From the standpoint of consumers, this high price makes monopoly undesirable. u However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable.
28 The Efficient Level of Output... Price Marginal cost Value to buyers Cost to monopolist Cost to monopolist Value to buyers Demand (value to buyers) 0 Efficient Quantity quantity Value to buyers is greater than cost to seller. Value to buyers is less than cost to seller.
29 The Deadweight Loss Because a monopoly sets its price above marginal cost, it places a wedge between the consumer s willingness to pay and the producer s cost. uthis wedge causes the quantity sold to fall short of the social optimum.
30 The Inefficiency of Monopoly... Price Deadweight loss Marginal cost Monopoly price Marginal revenue Demand 0 Monopoly quantity Efficient quantity Quantity
31 The Inefficiency of Monopoly The monopolist produces less than the socially efficient quantity of output.
32 The Deadweight Loss u The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax. u The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.
33 Public Policy Toward Monopolies Government responds to the problem of monopoly in one of four ways. u u u u Making monopolized industries more competitive. Regulating the behavior of monopolies. Turning some private monopolies into public enterprises. Doing nothing at all.
34 Increasing Competition with Antitrust Laws u Antitrust laws are a collection of statutes aimed at curbing monopoly power. u Antitrust laws give government various ways to promote competition. u They allow government to prevent mergers. u They allow government to break up companies. u They prevent companies from performing activities which make markets less competitive.
35 Two Important Antitrust Laws u Sherman Antitrust Act (1890) u Reduced the market power of the large and powerful trusts of that time period. u Clayton Act (1914) u Strengthened the government s powers and authorized private lawsuits.
36 Regulation Government may regulate the prices that the monopoly charges. u The allocation of resources will be efficient if price is set to equal marginal cost.
37 Marginal-Cost Pricing for a Natural Monopoly... Price Average total cost Regulated price Loss Average total cost Marginal cost 0 Demand Quantity
38 Regulation In practice, regulators will allow monopolists to keep some of the benefits from lower costs in the form of higher profit, a practice that requires some departure from marginal-cost pricing.
39 Public Ownership Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself. (e.g. in the U.S., the government runs the Postal Service).
40 Doing Nothing Government can do nothing at all if the market failure is deemed small compared to the imperfections of public policies.
41 Price Discrimination Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
42 Price Discrimination Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some market power.
43 Perfect Price Discrimination Perfect price discrimination refers to the situation when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.
44 Price Discrimination u Two important effects of price discrimination: u It can increase the monopolist s profits. u It can reduce deadweight loss.
45 Welfare Without Price Discrimination... Price (a) Monopolist with Single Price Consumer surplus Monopoly price Profit Deadweight loss Marginal cost Marginal revenue Demand 0 Quantity sold Quantity
46 Welfare With Price Discrimination... Price (b) Monopolist with Perfect Price Discrimination Profit Marginal cost Demand 0 Quantity sold Quantity
47 Examples of Price Discrimination u Movie tickets u Airline prices u Discount coupons u Financial aid u Quantity discounts
48 The Prevalence of Monopoly u How prevalent are the problems of monopolies? u Monopolies are common. u Most firms have some control over their prices because of differentiated products. u Firms with substantial monopoly power are rare. u Few goods are truly unique.
49 Summary u A monopoly is a firm that is the sole seller in its market. u It faces a downward-sloping demand curve for its product. u A monopoly s marginal revenue is always below the price of its good.
50 Summary u Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal. u Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.
51 Summary u A monopolist s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. u A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.
52 Summary u Policymakers can respond to the inefficiencies of monopoly behavior with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise. u If the market failure is deemed small, policymakers may decide to do nothing at all.
53 Summary u Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay. u Price discrimination can raise economic welfare and lessen deadweight losses.
While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The
Chapter 15: Monopoly (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- Monopolies have no close competitors and,
15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly
CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions
ECON 101 Introduction to Economics1 Session 12 Market Structures(Monopoly) Lecturer: Mrs. Hellen A. Seshie-Nasser, Department of Economics Contact Information: firstname.lastname@example.org College of Education School
C H A P T E R Monopoly Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Vance Ginn & Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved In
Imperfect Competition (Monopoly) Chapters 15 Mankiw What did we learn one week ago? Regulated prices Effect of a ceiling price Effect of a floor price. The cost of taxes and subsidies. Tax on producers
In this session we will look at monopolies, where there is only one firm in the market with no close substitutes. For example, Microsoft first designed the operating system Windows. As a result of this
Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists In which there is one supplier that is protected from competition by a barrier preventing
Roger LeRoy Miller Economics Today Twelfth Edition Chapter 24 Monopoly Introduction The cement market in Mexico is dominated by a single company that accounts for more than 70 percent of all sales. Why
Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic
Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:
s in Competitive Markets WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. The goods offered by the various
McPeak Lecture 10 PAI 723 The competitive model. Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good. As we derived a demand curve for an individual
Micro - HW 4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In central Florida during the spring, strawberry growers are price takers. The reason
These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 12 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter
ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):
1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want
Introduction to Economic Analysis. Antonio Zabalza. University of Valencia 1 Lesson 5: Market Structure (II) 5.1 The Monopoly A monopoly is a firm that has influence on the price it charges for its product.
Chapter 24 Monopoly Introduction States have various licensing requirements for individuals who wish to practice specific professions. For example, Ohio requires a $100 license fee to become a kick boxer.
I. Learning Objectives In this chapter students should learn: A. The characteristics of pure monopoly. B. How a pure monopoly sets its profit-maximizing output and price. C. The economic effects of monopoly.
Perfect Competition Michael J. Murray Slides and Images, Worth Publishers Inc. 8-1 Market Structure Analysis By observing a few industry characteristics, we can predict pricing and output behavior of the
Agenda 1. Profit Maximization by a Monopolist 2. Marginal Revenue 3. Profit Maximization Exercise 4. Effect of Elasticities on Monopoly Price 5. Comparative Statics of Monopoly 6. Monopolist with Multiple
MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue
23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven
Monopolistic Markets Causes of Monopolies The causes of monopolization Monoplositic resources Only one firm owns a resource which is crucial for production (e.g. diamond monopol of DeBeers). Monopols created
Practice Test for Midterm 2 Econ 2010-200 Fall 2009 Instructor: Soojae Moon Please read carefully and choose the choice that best completes the statement or answers the question. Table 7-2 This table refers
CHAPTER 8: SECTION 1 A Perfectly Competitive Market Four Types of Markets A market structure is the setting in which a seller finds itself. Market structures are defined by their characteristics. Those
ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is defined as a. net revenue
Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly
10 Pure Monopoly McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Four Market Models Characteristics of the Four Basic Market Models Characteristic Number of firms
Chapter 10: Monopoly Answers to Study Exercise Question 1 a) horizontal; downward sloping b) marginal revenue; marginal cost; equals; is greater than c) greater than d) less than Question 2 a) Total revenue
Teaching about Market Structures Felix B. Kwan, Ph.D. Professor of Econ/Finance, Maryville University AP Econ Conference - FRB St. Louis June 17-19, 2015 Profits Foundational Concepts Some basic terms/concepts
Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique
ECN 3103 INDUSTRIAL ORGANISATION 3. Monopoly Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016 OUR PLAN Monopoly Reference for reviewing these concepts: Carlton, Perloff, Modern
ECO 300 Fall 2005 November 10 MONOPOLY PART 1 INTERPRETATION Literally, just one firm in an industry But interpretation depends on how you define industry General idea a group of commodities that are close
Chapter 16 Monopolistic Competition TRUE/FALSE 1. The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market. ANS: T 2. The "monopoly" in monopolistically
OBJECTIVES Explain how managers should set price and output when they have market power With monopoly power, the firm s demand curve is the market demand curve. A monopolist is the only seller of a product
1 Chapter 1-Theory of Monopoly Syllabus-Concept of imperfect competition, Short run and long run price and output decisions of a monopoly firm, Concept of a supply curve under monopoly, comparison of perfect
www.liontutors.com ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount
MEPS Preparatory and Orientation Weeks Master of Science in Economic Policy March 2012 Lectures by Kristin Bernhardt Fundamentals of Microeconomics 1. Introduction 2. Markets 3. Consumers and Households
Eco201 Review questions for chapters 13-15 Prof. Bill Even ====QUESTIONS FOR CHAPTER 13============================= 1) A monopoly has two key features, which are. A) barriers to entry and close substitutes
Laugher Curve Monopoly 2 Bad things that monopolist do! The First Law of Economics: For every economist, there exists an equal and opposite economist. The Second Law of Economics: They're both wrong. The
In the Name of God Sharif University of Technology Graduate School of Management and Economics Microeconomics (for MBA students) 44111 (1393-94 1 st term) - Group 2 Dr. S. Farshad Fatemi Market Structure
Final Exam Practice Multiple Choice Questions - ANSWER KEY Which of the following statements is not correct? a. Monopolistic competition is similar to monopoly because in each market structure the firm
Chapter 11 Monopoly Topics Monopoly Profit Maximization. Market Power. Welfare Effects of Monopoly. Cost Advantages That Create Monopolies. Government Actions That Create Monopolies. Government Actions
7.1 Perfect Competition and Monopoly Objectives Distinguish the features of perfect competition. Describe the barriers to entry that can create a monopoly. Compare the market structures of monopoly and
I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.
Micro Problem Set III WCC Fall 2014 A=True / B=False 15 Points 1) If MC is greater than AVC, AVC must be rising. 2) All combinations of capital and labor along a given isoquant cost the same amount. 3)
MICROECONOMICS CHAPTER 10A/23 PERFECT COMPETITION Professor Charles Fusi Learning Objectives Identify the characteristics of a perfectly competitive market structure Discuss the process by which a perfectly
8.1 Setup Monopoly is a single firm producing a particular commodity. It can affect the market by changing the quantity; via the (inverse) demand function p (q). The tradeoff: either sell a lot cheaply,
I. Learning Objectives In this chapter students should learn: A. How the long run differs from the short run in pure competition. B. Why profits encourage entry into a purely competitive industry and losses
Midterm #2 Practice Multiple Choice Questions: Elasticity is a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects
Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is correct? A) Consumers have the ability to buy everything
The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph
Economics 2 Spring 2018 Professor Christina Romer Professor David Romer LECTURE 9 MONOPOLY February 13, 2018 I. OVERVIEW OF MARKET FAILURES A. What are market failures and why do they matter? B. Definition
Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Def: Market is a group of buyers and sellers of a particular good or service. P. 66. b. Def: A competitive
Monopoly Monopoly occurs when there is a single seller of a good or service. Despite this simple definition that is usually given in textbooks, we must criticize it a bit. Monopoly occurs when there is
ECON 115 Industrial Organization 1. Tonight is a calculus review. 2. And a review of basic microeconomics. 3. We will do a couple of problems in class. First hour: Calculus Thinking on the margin. Introducing
Perfect Competition & Welfare Outline Derive aggregate supply function Short and Long run euilibrium Practice problem Consumer and Producer Surplus Dead weight loss Practice problem Focus on profit maximizing
CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect
1.5 Theory of the firm and its market structures - Monopoly Syllabus item: 57 Weight: 3 Main idea 1 Monopoly: - Only one firm producing the product (Firm = industry) - Barriers to entry or exit exists,
13-1 INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY Monopolistic Competition Pure monopoly and perfect competition are rare in the real world. Most real-world industries
ECON 202-501 Fall 2008 Xiaoyong Cao Final Exam Form A Instructions: The exam consists of 2 parts. Part I has 35 multiple choice problems. You need to fill the answers in the table given in Part II of the
Special Pricing Practices Chapter 11 Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Special Pricing Policies Introduction Cartel Arrangements Revenue
Welfare economics part 2 (producer surplus) Application of welfare economics: The Costs of Taxation & International Trade Dr. Anna Kowalska-Pyzalska Department of Operations Research Presentation is based
A Model of Monopoly Monopoly Profit Maximization How much should the monopolistic firm choose to produce if it wants to maximize profit? Chapter 15-3 The Monopolist s and The first thing to remember is
Review 10-14-15 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1. The four-firm concentration ratio equals the percentage of the value of accounted
Lecture 20: Price Discrimination, Monopoly Rents and Social Surplus Monopoly p 1 A monopoly price increase leads to an increase in monopoly profits whenever p 2 Example: Monopoly Profit Maximization (The
Perfect Competition In this section of work and the next one we derive the equilibrium positions of firms in order to determine whether or not it is profitable for a firm to produce and, if so, what quantities
ECON 251 Practice Exam 2 Questions from Exams Gordon spends all his income on spatulas and mixing bowls. Spatulas cost $4 and mixing bowls cost $12. Gordon has $60 of income and considers both spatulas
Amherst College epartment of Economics Economics 54 Fall 2005 Thursday, October 13: Short and Long Run Equilibria Equilibrium in the Short Run The equilibrium price and quantity are determined by the market
Monopoly. Principles of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side
Lecture 2 Perfectly competitive markets Kosmas Marinakis, Ph.. Important notes 1. Homework 1 will is due on Monday 2. Practice problem set 2 is online microeconomics II first module 2013-18 Kosmas Marinakis,
Advanced Microeconomic Theory Chapter 7: Monopoly Outline Barriers to Entry Profit Maximization under Monopoly Welfare Loss of Monopoly Multiplant Monopolist Price Discrimination Advertising in Monopoly
Lecture 2: Market Structure I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology October 1, 2012 EC 105. Industrial Organization ( Matt
Why do monopolies charge different prices to different customers: price discrimination: eg mobile phone tariffs) We have previously seen how a monopolist chooses his profit maximising output - Which is
Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. This arises due to consumers indifference between the
UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Fall 2013 Monopolistic markets and pricing with market power (PR 10.1-10.4 and 11.1-11.4) Module 4 Sep. 20, 2014
14.23 Government Regulation of Industry Class 2 MIT & University of Cambridge 1 Outline Definitions Perfect Competition and Economic Surplus Monopoly and Deadweight Losses Natural Monopolies X-inefficiency