This document discusses monopoly markets. It defines a monopoly as a single seller or producer having complete control over the market for a good or service, with no close substitutes. It notes that monopolies arise due to legal, strategic, or natural barriers to entry. The monopoly firm is a price maker and can engage in price discrimination. It maximizes profits by producing at the quantity where marginal revenue equals marginal cost. Monopolies cause welfare losses but these can be addressed through antitrust laws, price regulation, or government ownership.

1. THE THEORY OFTHE THEORY OF
THE FIRM-THE FIRM-
MONOPOLYMONOPOLY
R.GNANESHWARI

2. Monopoly
“Mono” literally means one. “poly”
implies seller. (one seller)
monopoly is a market situation denotes
a single seller or producer having the
complete control over the market.

3. Features
 Single seller of the commodity
 No close substitute
 Barrier to entry
 Price maker
 Price discrimination

4. Creation of monopolies
A monopoly arises as a result of
barrier to entry.
–Legal
–Strategic
–Natural(economies of scale)

5. (1) Legal Barriers
 Public Franchise
 Patents, Trademarks, Copyrights
 Licenses, and Other Regulations
(2) Strategic barriers
Strategic barriers raise the costs of entry
and result from the policies of existing
firms in an industry.

6. (3) Economies of Scale
 A natural monopoly arises when there is a
large economies of scale
 Costs per unit in an industry may be low
only when a firm produces a lot of output
Examples are electric power companies andExamples are electric power companies and
other similar utility providers.other similar utility providers.

7. Types of monopoly
1. Private monopoly
2. Public monopoly
3. Simple monopoly
4. Discriminating monopoly
5. Natural monopoly
6. Pure monopoly
7. Imperfect monopoly

8. TR, AR, MR UNDER
MONOPOLY
1. Total Revenue:
the overall revenue received by a
monopoly firm for the sale of its output.
PP ×× Q = TRQ = TR
2. Average revenue:
price received per unit sold.
AR =TR/QAR =TR/Q

9. since TR=P x Q, then AR = Psince TR=P x Q, then AR = P
3. Marginal revenue:
an additional amount of money received
from the sells of one additional unit
produced.
MR=MR= ∆∆TR/TR/∆∆QQ

10. AR

11. Demand curve

12. Elasticity of demand
E>1
E=1
E<1

13. There is no supply curve under
monopolistic market.
Reason ...

14. Control over price
Equates MR=MC
Shape of the demand curve
Shifts in demand leads to change in
price, output or both

15. Profit maximization
 The monopoly maximizes profit when
marginal revenue equals marginal cost.
MR=MC
 Marginal cost (MC) is the change in
total cost associated with a change in
quantity

17. Output

18. If MR > MC, the monopolist gains profit
by increasing output.
If MR < MC, the monopolist gains profit
by decreasing output.
If MC = MR, the monopolist is
maximizing profit.

20. Monopoly Possibilities
Short run:
positive profits, losses, or breaking
even.
Long run:
positive profits, or breaking even.

21. Price Discrimination
Charging different prices to different
buyers for identical products.
Conditions must be satisfied
– Must be a downward-sloping demand curve for the
firm’s output
– Firm must be able to identify consumers willing to
pay more
– Firm must be able to prevent low-price customers
from reselling to high-price customers

23. Examples
Travel industry: airlines and other
travel companies use differentiated
pricing often.
Coupons: coupons are used to
distinguish consumers by their reserve
price.

24. Welfare cost of monopoly
 a monopoly
• sets price above marginal cost (and
above the competitive price)
• causes consumers to buy less than the
competitive level of output
• generates deadweight loss

26. Regulation
 If a monopoly results in a misallocation of
resources, it is inefficient
– Regulation may be required
 Three major methods increase the benefit
of monopolies to society:
- Antitrust law
- Price regulation
- Government ownership

27.  ANTITRUST LAW
In the United States, the 2 major antitrust
laws are the Sherman Antitrust Act,
passed in 1890, and the Clayton Antitrust
Act, passed in 1914.
 PRICE REGULATION
Many economists believe that it is important
for the prices of regulated monopolies to
reflect the marginal cost of production
(natural monopoly).

29.  GOVERNEMENT OWNERSHIP
Main government policies for addressing
inefficiencies of monopoly power
– Break up firm (e.g., Microsoft
corporation)
– Regulate it (e.g.,US Postal Service)

30. Summary
Sole seller in its market.
Types of monopoly
Marginal revenue is always below the
price of its good.
Downward-sloping demand curve for
its product.
A monopoly maximizes profit where
MR=MC

31. Price discrimination can raise economic
welfare and lessen deadweight losses.
The inefficiencies of monopoly behavior
with antitrust laws, regulation of prices, or
by turning the monopoly into a
government-run enterprise.