A monopoly is a sole seller that is a price maker and faces a downward sloping demand curve. Monopolies can arise from barriers to entry such as government protections like patents. Unlike competitive firms, monopolies produce less than the efficient quantity and charge a price above marginal cost, resulting in deadweight loss. Governments address monopolies through regulation, antitrust laws, or public ownership.

1. 15 Monopoly

11. Figure 1 Economies of Scale as a Cause of Monopoly Copyright © 2004 South-Western Quantity of Output 0 Cost Average total cost

13. Figure 2 Demand Curves for Competitive and Monopoly Firms Copyright © 2004 South-Western Quantity of Output (a) A Competitive Firm ’ s Demand Curve (b) A Monopolist ’ s Demand Curve 0 Price Quantity of Output 0 Price Demand Demand

15. Table 1 A Monopoly’s Total, Average, and Marginal Revenue Copyright©2004 South-Western

18. Figure 3 Demand and Marginal-Revenue Curves for a Monopoly Copyright © 2004 South-Western Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 0 – 1 – 2 – 3 – 4 1 2 3 4 5 6 7 8 Demand (average revenue) Marginal revenue

20. Figure 4 Profit Maximization for a Monopoly Copyright © 2004 South-Western Quantity Q 0 Costs and Revenue Q Demand Average total cost Marginal revenue Marginal cost Monopoly price Q MAX B 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity . . . A 2. . . . and then the demand curve shows the price consistent with this quantity.

23. Figure 5 The Monopolist’s Profit Copyright © 2004 South-Western Quantity 0 Costs and Revenue Monopoly profit Average total cost Monopoly price Q MAX Demand Marginal cost Marginal revenue Average total cost B C E D

25. Figure 6 The Market for Drugs Copyright © 2004 South-Western Quantity 0 Costs and Revenue Demand Marginal revenue Price during patent life Monopoly quantity Price after patent expires Marginal cost Competitive quantity

27. Figure 7 The Efficient Level of Output Copyright © 2004 South-Western Quantity 0 Price Demand (value to buyers) Marginal cost Value to buyers is greater than cost to seller. Value to buyers is less than cost to seller. Cost to monopolist Cost to monopolist Value to buyers Value to buyers Efficient quantity

29. Figure 8 The Inefficiency of Monopoly Copyright © 2004 South-Western Quantity 0 Price Deadweight loss Demand Marginal revenue Marginal cost Efficient quantity Monopoly price Monopoly quantity

36. Figure 9 Marginal-Cost Pricing for a Natural Monopoly Copyright © 2004 South-Western Quantity 0 Price Loss Demand Average total cost Regulated price Marginal cost Average total cost

43. Figure 10 Welfare with and without Price Discrimination Copyright © 2004 South-Western (a) Monopolist with Single Price Price 0 Quantity Profit Deadweight loss Demand Marginal revenue Consumer surplus Quantity sold Monopoly price Marginal cost

44. Figure 10 Welfare with and without Price Discrimination Copyright © 2004 South-Western (b) Monopolist with Perfect Price Discrimination Price 0 Quantity Profit Demand Marginal cost Quantity sold