Pure monopoly: Definitions, characteristics and formulas

For graphs - look in notebook

Characteristics:

1. Single seller

2. No close substitutes

3. Price maker

4. Blocked entry

Single seller

only 1 firm

No close substitutes

This occurs because only 1 firm produces that good

Price maker

The firm can control the price that they charge

Blocked entry

there are high barriers to entry and exit

Output effect -

when Q increases, TR increases

Price effect -

when P falls, TR decreases

If output effect is > price effect:

TR increases

If price effect > output effect

TR decreases

Remember that MR is always

> price of good because the market’s demand is the firm’s demand

AR =

TR / Q = Price

MR =

change in TR / change in Q

In a pure monopoly, demand =

marginal benefit

A pure monopoly is not allocatively efficient because:

DWL occurs as the firm (in a pure monopoly) produces more/less of a good than EQ. Thus, P never = MC

What happens when monopolies underproduce + overcharge?

Because of underproduction: PS increases

Because of overcharging: CS decreases

Monopolies are not productively efficient because:

P isn’t at the min. point of the ATC (look at graph in notebook)