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# Monopoly types AP + Graphs

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• When the AR column appears, note that AR = P at every quantity. This, of course, is a tautology.
When the MR column appears, note that MR is less than P. This is not as easy to see, because the MR numbers are offset from the rows of the table, just as if you were in an elevator stuck between two floors. But students can still see that MR &lt; P.
For example, in the range of output of Q=2 to Q=3, the price ranges from \$3.50 to \$3.00, but MR is only \$2.
• The numbers in the table are from the preceding exercise. Students can see either from the table or the graph that, at any Q, MR &lt; P.
• Note that a competitive firm has the output effect but not the price effect: the competitive firm does not need to reduce its price in order to sell a larger quantity, so, for the competitive firm, MR = P.
• It’s worth mentioning the following:
Most people know that monopoly changes the way the economic “pie” is divided: by charging higher prices, the monopoly gets more surplus and consumers get less surplus.
The analysis on this slide shows that the monopoly also reduces the size of the economic pie – by producing less than the socially efficient quantity and causing a deadweight loss.
• ### Monopoly types AP + Graphs

1. 1. Bellringer Mankiw Ch 15 How would your life change if there was only one firm who: •Sold groceries •Provided university education •Fixed cars
2. 2. Competition experiment • 3 groups • 1 volunteer • Group of 3-4, can talk • Everyone else • Think about price & quality I will buy one for up to \$1 Widget: W Price: \$ Your name:
3. 3. Perfect Competition • P = MR = Demand • Good for consumers? • Good for firms?
4. 4. Economic Competition Today the lack thereof • 4 basic market types: – Perfect Competition – Monopolistic Competition – Oligopoly – Monopoly • Measures price/nonprice competition, and product differentiation
5. 5. Monopoly Market Model A market for a good/service with one dominate seller Firm has total “pricing power” The Ultimate Price MAKER! “barriers to entry” 3 Causes: 1. Private property or resource 2. Government 3. Lower cost production
6. 6. Types of Monopoly • Geographic • “fences” • Only firm in a certain area • Small towns • Mexican food? • Other example?
7. 7. Types of Monopoly • Government • Granted by the government • Quality issues
8. 8. Types of Monopoly • • • • • • Technological (Patents) (Copyrights) (Trade secrets) Due to technology Software, biotechnology, artistic • examples Root computing
9. 9. On your white boards Name the type of monopoly 1. Popcorn at Harkins movie theater 2. Interstate Highways like I-10 3. The only mechanic in a small town 4. School lunches at Pueblo 5. Snacks in certain Pueblo classrooms 6. Secret Formula for Coca-Cola 7. US military 8. Sun Tran transportation 9. Facebook (?)
10. 10. A C T I V E L E A R N I N G 1 A monopoly’s revenue Common Grounds is the only seller of cappuccinos in town. Q P 0 \$4.5 0 1 4.00 2 3.50 Fill in the missing spaces of the table. 3 3.00 What is the relation between P and AR? Between P and MR? 4 2.50 5 2.00 6 1.50 The table shows the market demand for cappuccinos. TR AR MR n.a. 12
11. 11. A C T I V E L E A R N I N G 1 Answers Here, P = AR, same as for a competitive firm. Here, MR < P, whereas MR = P for a competitive firm. Q P TR AR 0 \$4.50 \$0 n.a. 1 4.00 4 \$4.00 2 3.50 7 3.50 3 3.00 9 3.00 4 2.50 10 2.50 5 2.00 10 2.00 6 1.50 9 1.50 MR \$4 3 2 1 0 –1 13
12. 12. Common Grounds’ D and MR Curves Q P 0 \$4.50 1 4.00 2 3.50 3 3.00 4 2.50 5 2.00 6 1.50 MR \$4 3 2 1 0 –1 P, MR \$5 4 3 2 1 0 -1 -2 -3 0 Demand curve (P) MR 1 2 3 4 5 6 7 Q
13. 13. Understanding the Monopolist’s MR • Increasing Q has two effects on revenue: – Output effect: higher output raises revenue – Price effect: lower price reduces revenue • To sell a larger Q, the monopolist must reduce the price on all the units it sells. • Hence, MR < P • MR could even be negative if the price effect exceeds the output effect (e.g., when Common Grounds increases Q from 5 to 6). MONOPOLY 15
14. 14. Profit-Maximization • Like a competitive firm, a monopolist maximizes profit by producing the quantity where MR = MC. • Once the monopolist identifies this quantity, it sets the highest price consumers are willing to pay for that quantity. • It finds this price from the D curve. MONOPOLY 16
15. 15. Profit-Maximization 1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Costs and Revenue MC P2 P1 D MR Q Quantity Profit-maximizing output MONOPOLY 17
16. 16. The Monopolist’s Profit As with a competitive firm, the monopolist’s profit equals Costs and Revenue MC P ATC ATC D (P – ATC) x Q MR Q MONOPOLY Quantity 18
17. 17. A Monopoly Does Not Have an S Curve A competitive firm – takes P as given – has a supply curve that shows how its Q depends on P. A monopoly firm – is a “price-maker,” not a “price-taker” – Q does not depend on P; rather, Q and P are jointly determined by MC, MR, and the demand curve. So there is no supply curve for monopoly.
18. 18. The Welfare Cost of Monopoly • Recall: In a competitive market equilibrium, P = MC and total surplus is maximized. • In the monopoly eq’m, P > MR = MC – The value to buyers of an additional unit (P) exceeds the cost of the resources needed to produce that unit (MC). – The monopoly Q is too low – could increase total surplus with a larger Q. – Thus, monopoly results in a deadweight loss. MONOPOLY 20
19. 19. The Welfare Cost of Monopoly Competitive eq’m: Price quantity = QC P = MC total surplus is maximized Deadweight MC loss P P = MC MC D Monopoly eq’m: quantity = QM P > MC MR QM QC Quantity deadweight loss MONOPOLY 21
20. 20. Public Policy Toward Monopolies • Increasing competition with antitrust laws – Ban some anticompetitive practices, allow govt to break up monopolies. – E.g., Sherman Antitrust Act (1890), Clayton Act (1914) • Regulation – Govt agencies set the monopolist’s price. – For natural monopolies, MC < ATC at all Q, so marginal cost pricing would result in losses. – If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit. MONOPOLY 22
21. 21. Public Policy Toward Monopolies • Public ownership – Example: U.S. Postal Service – Problem: Public ownership is usually less efficient since no profit motive to minimize costs • Doing nothing – The foregoing policies all have drawbacks, so the best policy may be no policy. MONOPOLY 24