Monopoly

monopoly

a single firm in the market is the sole producer of a product for no substitutes

give different types of monopolies

• near monopolies

• pure monopolies 

• geographical monopolies 

give the characteristics of a monopoly

• single seller

• unique product

• price maker

• blocked entry

single seller

the single firm is the sole producer of the product where the industry and firm is synonymous

unique product

there are no close substitutes

price maker

monopolist control the total quantity supplied and will use their power whenever it is advantages to them

price-maker makes the demand curve…

downward sloping 

types of blocked entry

economies of scale, legal barriers, ownership of essential resources

what allows for greater economies for scale and why

technology because firm’s average costs decrease as output increases

why does the ‘L’ shaped LRAC cost curve continue to fall and not reach MES

it allows for monopolists to be protected from competition

what happens when monopolists are protected from competition 

new firms cannot compete with the same low cost and will be forced out of business by monopolist 

why does a natural monopoly occur

this happens if the market demand curve intersects the long-run ATC curve at any point where ATCs are still declining

what are the assumptions of monopolist

• patents, economies of scale or resource ownership secure the monopolist’s status

• no governmental regulation

• firm is a single-price monopolist

legal barriers 

patents and licensing 

ownership or control of essential resources

a monopolist may own or controls a resource that is essential to production

does MR = AR = D

no

when can the firm sell more units

if it reduces its prices

MR =…

change in TR/change in Q

what is MR greater than

price except for the first unit of output

what happens when MR falls

quantity rises and eventual turns <0

what happens when TR rises at a decreasing rate

it will eventually fall when MR < 0

what happens when MR = 0 

demand unit is elastic 

MR has the same…

vertical intercept as the AR curve and a horizontal intercept half that of the AR curve

where do monopolists produce

in the elastic region of the demand curve

how is a monopolist a price maker 

• will never choose a price-quantity combo where price reduction causes TR to decrease

• will choose price at elastic region 

how do you find output and price determination

• TR - TC

• MR=MC*

why is there no supply curve

because there is no unique relationship between P and Q

what is this firm making

economic profit

 

what is this firm making

normal profit 

what is this firm making 

economic losses

price discrimination

pricing strategy in which a seller prices the same product differently across markets based on what each market’s buyers are willing to pay

give the conditions in price discrimination

• monopoly power

• market segregation

• no resales

are price differences justified by cost differences

no

give examples where you will find price discrimination 

• airline charges 

• movies, gym, hotel reservation 

• coupons 

is a monopolist either allocative or productive efficient

no

in the short run, when will firms produce

where P>AVC

in the long run, when will firms produce

where P>ATC

natural monopoly 

the economies of scale mean that big firms have lower costs at small firms 

consumer surplus

the difference between what the consumer is willing to pay and actually pays (small)

producer surplus

the difference between what the producer is willing to sell it for and what it actually sells it for (big)

what does a monopoly give rise to

dead weight loss

deadweight loss 

a loss to society of quantity that is no longer being produced 

how does a monopoly regulate itself

• social optimum price

• fair return price

• dilemma of regulation

where do you find social optimum price

P=MC

where do you find fair return price

AC=AR