Pure monopoly


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Pure monopoly

  1. 1. Pure Monopoly
  2. 2. Key Terms • Pure monopoly occurs when there is a single seller of a product that has no close substitutes. No individual firm produces a large enough share of the total market supply to affect price/ monopoly, on the contrary, is characterized by concentration of supply in the hands of the owners of a single firm.
  3. 3. Key Terms • Monopoly Power is the ability of a firm to influence the price of its product by making more or less of it available to buyers. It is the main reason why there are barriers to entry which are constraints that prevent additional sellers from entering a monopoly firm’s market. It exists when a single firm controls 25% or more of a particular market.
  4. 4. Key Terms • Price Searchers are buyers and sellers having large enough shares of a market such that when they buy or sell more, they change the market price. • Public Franchise is the right granted to a firm by government that permits the firm to provide a particular good or service and that excludes all others from doing the same
  5. 5. Characteristics of a Pure Monopoly: 1) A single seller, the firm and the industry are synonymous. 2) Unique product 3) Profit maximized 4) Price maker 5) Price discriminator 6) Entry or exit is blocked
  6. 6. Types of Barriers to Entry: 1) Legal Restrictions 2) Patents 3) Control of Strategic Resource
  7. 7. Types of Cost Advantages: 1) Economies of Scale 2) Technological Superiority
  8. 8. Basic Elements Marginal Revenue A monopoly faces a downward-sloping demand curve: To sell more, it must lower its price. Consider the table below: Table 1 : The Effect of Price on Marginal Revenue Demand Curve Revenue Price Quantity Demanded Total Revenue(PxQ) Marginal Revenue $10 1 $10 $10 9 2 18 8 8 3 24 6 7 4 28 4 6 5 30 2 5 6 30 0 4 7 28 -2 3 8 24 -4 2 9 18 -6 1 10 10 -8
  9. 9. Facts about Marginal Revenue: 1. Marginal Revenue = Price - Loss from Price Cut on Prior Output. 2. MR < P whenever the firm has to cut its price to sell more. 3. The firm will never produce where MR is negative. 4. Total revenue is largest at the level of output at which MR = 0. 5. When demand is elastic, more output increases total revenue, and so MR > 0. In general we have:
  10. 10. Facts about Marginal Revenue: Table 2. How Elasticity of Demand Affects Marginal Revenue Elasticity Of Demand Marginal Revenue Elastic (>1) Positive Unitary (=1) Zero Inelastic (<1) Negative
  11. 11. Facts about Marginal Revenue: 6) Because of 3 and 5 above, a firm will never produce where the firm’s demand is inelastic. 7) If the demand schedule is a downward-sloping straight line, then (a) the marginal revenue curve is twice as steep as the demand curve and (b) the MR curve intersects the bottom axis at half the output the demand curve does. 8) The total revenue curve shows the total revenue at each level of output. MR is the slope of the total revenue curve.
  12. 12. The Output Decision Short-run rule: Produce where MR = MC if P AVC. Long-run rule: Produce where MR = MC if P ATC.
  13. 13. Graphical Representations MC ATC DMR P Q Profit P1 C Q1
  14. 14. Graphical Representations Loss MCP P1 C Q1 Q MR D ATC
  15. 15. Monopolies’ Fallacies and Facts • Fallacies: 1. “Monopolies charge the highest price they can get.” 2. “Monopolies always make a profit.” 3. “Monopolies produce where they make the highest average profit per unit.”
  16. 16. Monopolies’ Fallacies and Facts • Facts: 1. Monopolies do not necessarily produce at the lowest average cost. 2. Monopolies produce only where demand is elastic. 3. Price exceeds marginal cost. 4. A monopoly does not have a supply curve 5. Monopolies produce less than competitive firms when costs are the same.
  17. 17. Price Discrimination • So far we have assumed that monopoly sells all its output for the same price. But the monopoly may be able to charge a different price for different units. Price discrimination results in: • More profits (because of the higher MR) • More output (because of the higher MR)
  18. 18. Price Discrimination • Perfect Price Discrimination occurs when the monopoly gets the demand price for each unit. Two main methods of price discrimination: • Method one: Volume Discounts • Method two: Segregated Markets
  19. 19. Taxes and Monopolies • Lump-Sum Tax A lump-sum tax is a tax that is the same no matter what the monopoly produces. Just as a change in fixed costs has no effect on MC, a lump-sum tax has no effect on MC and so has no effect on the monopoly’s optimal output where MR=MC or price.
  20. 20. Taxes and Monopolies • Unit Tax A unit tax is a tax per unit of output. It increases MC. So it has the same effect as an increase in wages or other variable costs.