4.2 - Monopoly

Types of Monopolies

• Pure Monopoly - controls 100% of a specific good/service

  • only company that makes what it is making

  • illegal and is almost impossible

• Near Monopoly - Almost pure monopoly (above 80% control of a market)

• Natural Monopoly

• Regulated Monopoly

3 Basic Assumptions:

• No entry

• No regulation

• All customers pay the same price

• MR>=MC (Profit Maximization)

• MR is separate from DARP

• MR has twice the slope of D=AR=P

• When MR=0 Total Revenue is maximized (unit elasticity)

• When MR is +, D is elastic

• When MR is -, D is inelastic

• Profit max at MR=MC

• Single Graph

  • Market Supply=MC above AVC

  • Market Demand = D=AR=P

• Monopoly Misconceptions

  • Not Highest Price

  • Possibility of Losses

• Loss minimization

  • When Pm exceeds AVC, the firm will produce

• At MR=MC a monopolist will sell fewer units at a higher price than in perfect competition

• Monopolies transfer CS to PS and create DWL