This document contains lecture slides about monopoly. It discusses how a profit-maximizing monopolist determines the quantity to produce by setting marginal revenue equal to marginal cost. It also discusses how the monopolist's profit is determined, the welfare cost of monopoly due to deadweight loss, and how perfect price discrimination allows a monopolist to capture consumer surplus as profit without creating deadweight loss. Finally, it notes that in reality, perfect price discrimination is not possible so firms instead segment customers into groups based on observable traits related to willingness to pay.

1. Lecture PowerPoint® Slides
to accompany
Prepared by
Marc Prud‘Homme, University of Ottawa 1

2. Chapter 15
Monopoly
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3. Profit-Maximization
Costs and
1. The profit- Revenue MC
maximizing Q
is where P
MR = MC.
2. Find P from
D
the demand
curve at this Q. MR
Q Quantity
Profit-maximizing output
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4. The Monopolist’s Profit
Costs and
Revenue MC
As with a P
ATC
competitive firm, ATC
the monopolist’s
profit equals D
(P – ATC) x Q MR
Q Quantity
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5. The Welfare Cost of Monopoly
Competitive eq’m:
Price Deadweight
quantity = QC MC
P = MC loss
total surplus is P
P = MC
maximized
MC
Monopoly eq’m:
D
quantity = QM
MR
P > MC
deadweight loss QM QC Quantity
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6. Perfect Price Discrimination vs.
Single Price Monopoly
Here, the monopolist
produces the Price
Monopoly
competitive quantity, profit
but charges each
buyer his or her WTP.
This is called perfect MC
price discrimination. D
The monopolist
MR
captures all CS
as profit. Quantity
But there’s no DWL. Q
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7. Price Discrimination in the Real World
 In the real world, perfect price discrimination is
not possible:
• No firm knows every buyer’s WTP
• Buyers do not announce it to sellers
 So, firms divide customers into groups
based on some observable trait
that is likely related to WTP, such as age.
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