ECONS 101 - Pure Monopoly

Pure Monopoly Characteristics

• Single Seller

• product has no close substitutes

• price makers

• barriers to entry

Monopoly Power

The ability of a monopoly to influence prices by controlling the quantities that it produces in the market.

Marginal Revenue

= (Change in TR)/(Change in Q)

If a monopoly wants to increase its quantity it must

lower the price for every unit it sells

A monopolist must ______ the selling price to sell more goods or services.

lower

Marginal revenue is ____ than the selling price

lower

The marginal revenue curve is always ______ the demand curve

below

A pure monopolist produces the quantity of output

where

MR = MC

As price makers, they set the price using the _____ curve at the ______level of output.

demand, MR = MC

Allocative Efficiency

Achieved when a firm produces where MB = MC

Pure monopolies stop short of allocative efficiency, in order to

maximize their profits. (MB > MC)

Productive Efficiency

Achieved using the fewest resources to produce a good or service

Pressures towards productive efficiency _______ in monopolistic markets

do not exist

A monopolist_____ allocatively efficient.

is not

A monopolist generates

deadweight losses

First-Degree Price Discrimination

The practice of charging each and every consumer the price that she is willing and able to pay for a good or service. Also known as perfect price discrimination or personal pricing

First-Degree Price Discrimination Example

Auction

Second-Degree Price Discrimination

The practice of charging different prices per unit for different quantities, or blocks, of a good or service. Also known as block pricing

Second-Degree Price Discrimination Example

?

Third-Degree Price Discrimination

The practice of dividing market participants into groups based on their elasticities of demand in order to charge each group a different price for the same good or service

Third-Degree Price Discrimination Example

Different Pricing for Bus Tickets (Adults, Children, Senior)

Natural Monopoly

An industry in which economies of scale are so extensive that the market is better served by a single firm (electricity companies)

Unregulated Monopoly Price

The profit-maximizing price that will result from an unregulated monopolistic market.

Regulated Normal Profit Price

A regulated price that is equal to the average total cost of production. The normal profit price can be found where the average total cost curve intersects the demand curve.

P_c = ATC = D

Regulated Competitive Price

A regulated price that is equal to the marginal cost of production. The competitive price can be found where the marginal cost curve intersects the demand curve, and it is allocatively efficient.

P_c = MC = D

Natural Monopolies: Summary

• Have lower ATC than multiple firms supplying the market

• Price regulation focuses on either

• normal profit price (P = ATC = D)

• competitive price (P = MC = D)