Chapter 14 Monopoly

monopoly

a monopoly refers to a firm that is the only producer of a good service with no close susbtitutes

perfect monopoly

a firm is a perfect monopoly if it controls the entire market

Monopoly power

a firm has monopoly power if it can manipulate the price

monopolies exist bc of barriers to entry that prevent other firms from entering the market

1. scarce resources

2. government intervention

3. economies of scale

4. aggressive business tactics

natural monopoly

refers to a market where a single firm can produce the entire market quantity demanded at a lower cost than multiple firms

Perfectly competitive market graphs

1. Horizontal demand curve: Firm is a price taker (P = MR = AR).

2. MC intersects both ATC and AVC at their minimum points.

3. Profit maximization occurs where P = MC.

4. Short-run profit: P > ATC

5. Short-run loss: AVC < P < ATC

6. Shutdown: P < AVC

7. In long-run, P = min ATC → zero economic profit

Monopolisitic market graphs

• Downward-sloping demand curve: Monopoly has market power.

• MR curve lies below the demand curve.

• Profit-maximizing output: where MR = MC

• Price is found by going up to the demand curve from that quantity.

• Monopoly earns positive economic profit if P > ATC.

• There is a deadweight loss (market is inefficient compared to perfect competition)

Problems with monpoly

• Higher prices and lower output than in perfect competition.

• Allocative inefficiency: P > MC

• Deadweight loss due to unproduced mutually beneficial trades.

• X-inefficiency: less pressure to minimize costs.

• Potential for price discrimination and consumer exploitation.

• Can lead to barriers to innovation or lobbying for protection.

Calculating deadweight loss from monopoly graph

• DWL is the triangle between the demand curve and MC curve, over the range of output between monopoly quantity and competitive quantity.

• Formula:

  DWL=12×(Quantity difference)×(Price difference)

• DWL represents the lost gains from trade—units that consumers value more than they cost to produce but aren’t produced due to monopoly restriction.

• Perfect competition has no DWL because P = MC.

when a monpolists produces more of a good,

the market price is driven down

quantity effect

total revenue increase

price effect

total revenue decreases