This document discusses monopoly markets and how they differ from competitive markets. It covers key concepts such as: 1) Monopolies, as sole producers, have downward sloping demand curves and are price makers, while competitive firms are price takers. 2) A monopoly's marginal revenue is always below its price, since lowering price reduces revenue from existing sales. Monopolies maximize profits where marginal revenue equals marginal cost. 3) Under a monopoly, price will exceed marginal cost to maximize profits, while under competition price equals marginal cost.

1. Monopoly

2. Monopoly versus Competition Monopoly Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales

3. Demand Curves for Competitive and Monopoly Firms... Quantity of Output Demand (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve 0 Price 0 Quantity of Output Price Demand

4. A Monopoly’s Revenue Total Revenue P x Q = TR Average Revenue TR/Q = AR = P Marginal Revenue  TR /  Q = MR

5. A Monopoly’s Total, Average, and Marginal Revenue Quantity (Q) Price (P) Total Revenue (TR=PxQ) Average Revenue (AR=TR/Q) Marginal Revenue (MR= ) 0 $11.00 $0.00 1 $10.00 $10.00 $10.00 $10.00 2 $9.00 $18.00 $9.00 $8.00 3 $8.00 $24.00 $8.00 $6.00 4 $7.00 $28.00 $7.00 $4.00 5 $6.00 $30.00 $6.00 $2.00 6 $5.00 $30.00 $5.00 $0.00 7 $4.00 $28.00 $4.00 -$2.00 8 $3.00 $24.00 $3.00 -$4.00 Q TR   /

6. A Monopoly’s Marginal Revenue A monopolist’s marginal revenue is always less than the price of its good. The demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.

7. Demand and Marginal Revenue Curves for a Monopoly... 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 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Marginal revenue Demand (average revenue)

8. Profit Maximization of a Monopoly A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. It then uses the demand curve to find the price that will induce consumers to buy that quantity.

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

10. Comparing Monopoly and Competition For a competitive firm, price equals marginal cost. P = MR = MC For a monopoly firm, price exceeds marginal cost. P > MR = MC

11. The Monopolist’s Profit... Quantity 0 Demand Marginal cost Marginal revenue Average total cost Monopoly profit Costs and Revenue Q MAX B Monopoly price E Average total cost D C

12. Long Run

13. Price Discrimination Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.

14. Examples of Price Discrimination Movie tickets Airline prices Discount coupons Financial aid Quantity discounts

15. Case I A monopolist firm sells a single product in two different markets either with different elasticities of demand

16. Case II Dumping - when the firm is a monopolistic in the domestic market but faces perfect competition in the world market