The document discusses key concepts related to monopoly markets including: 1) Monopolies have a single seller, sell a unique product without close substitutes, and erect barriers to entry. 2) A profit-maximizing monopolist will produce where marginal revenue equals marginal cost. 3) Monopolies can engage in price discrimination by charging different prices to different consumer groups.

1. MonopolyMonopoly

2. Review of Perfect CompetitionReview of Perfect Competition
 Large number of buyers and sellersLarge number of buyers and sellers
 Homogenous productHomogenous product
 Perfect informationPerfect information
 Firm is a price takerFirm is a price taker
 P = MC = ACP = MC = AC
 Normal profits or zero economicNormal profits or zero economic
profits in the long runprofits in the long run

3. Review of Perfect CompetitionReview of Perfect Competition
Q
P Market
D S
Q0
P0
Q
P Individual Firm
P0
AR = MR = P
q0
LRACLMC

4. MonopolyMonopoly
 MonopolyMonopoly
1.1. One seller - many buyersOne seller - many buyers
2.2. One product (no close substitutes) –One product (no close substitutes) –
eg. Public utilities – electricityeg. Public utilities – electricity
3.3. Barriers to entryBarriers to entry
4.4. Price MakerPrice Maker

5. MonopolyMonopoly
 The monopolist is the supply-side of theThe monopolist is the supply-side of the
market and has complete control over themarket and has complete control over the
amount offered for saleamount offered for sale
 Monopolist controls price but mustMonopolist controls price but must
consider consumer demandconsider consumer demand
 Profits will be maximized at the level ofProfits will be maximized at the level of
output where marginal revenue equalsoutput where marginal revenue equals
marginal cost (MR=MC)marginal cost (MR=MC)

6. Average and Marginal RevenueAverage and Marginal Revenue
 The monopolist’sThe monopolist’s average revenueaverage revenue,,
price received per unit sold, is theprice received per unit sold, is the
market demand curvemarket demand curve
 Monopolist also needs to findMonopolist also needs to find
marginal revenuemarginal revenue, change in, change in
revenue resulting from a unit changerevenue resulting from a unit change
in outputin output

7.  The demand curve for theThe demand curve for the
monopolist is negatively sloped –monopolist is negatively sloped –
monopolist must lower price to sellmonopolist must lower price to sell
additional unitsadditional units
 MR<P = ARMR<P = AR
 MR is twice as steep as demandMR is twice as steep as demand
curvecurve
Average and Marginal RevenueAverage and Marginal Revenue

8. Average and Marginal RevenueAverage and Marginal Revenue
Output1 2 3 4 5 6 70
1
2
3
$ per
unit of
output
4
5
6
7
Average Revenue (Demand)
Marginal
Revenue

9. MonopolyMonopoly
 ObservationsObservations
1.1. To increase sales the price must fallTo increase sales the price must fall
2.2. MR < PMR < P
3.3. Compared to perfect competitionCompared to perfect competition
 No change in price to change salesNo change in price to change sales
 MR = PMR = P

10. Monopolist’s Output DecisionMonopolist’s Output Decision
1.1. Profits maximized at the outputProfits maximized at the output
level where MR = MClevel where MR = MC
2.2. Cost functions are the sameCost functions are the same
MRMCor
MRMCQCQRQ
QCQRQ
=
−==∆∆−∆∆=∆∆
−=
0///
)()()(
π
π

11. MC
AC
Quantity
Cost, Price
D = AR
MR
P*
Q*
Monopolist’s Output DecisionMonopolist’s Output Decision
AC
Profit

12. Quantity
Cost,
Price
Monopolist’s Output DecisionMonopolist’s Output Decision
Loss
MC
AC
P=AR
MR

13. Quantity
Cost,
Price
Shutdown DecisionShutdown Decision
Loss
MC
AC
P=AR
MR
AVC
ATC>P<AVC,
hence shutdown

14. Measuring Monopoly PowerMeasuring Monopoly Power
 Monopoly power could be measured by theMonopoly power could be measured by the
extent to which price is greater than MC forextent to which price is greater than MC for
each firmeach firm
 Lerner’s Index of Monopoly PowerLerner’s Index of Monopoly Power
– L = (P - MC)/PL = (P - MC)/P
The larger the value of L (between 0The larger the value of L (between 0
and 1) the greater the monopoly powerand 1) the greater the monopoly power
– L is expressed in terms of EL is expressed in terms of Edd
 L = (P - MC)/P = -1/EL = (P - MC)/P = -1/Edd
 EEdd is elasticity of demand for a firmis elasticity of demand for a firm

15. Monopoly PowerMonopoly Power
 Monopoly power, however, does notMonopoly power, however, does not
guarantee profitsguarantee profits
 Profit depends on average costProfit depends on average cost
relative to pricerelative to price
 One firm may have more monopolyOne firm may have more monopoly
power but lower profits due to highpower but lower profits due to high
average costsaverage costs

16. Monopoly PowerMonopoly Power
 Pricing for any firm with monopolyPricing for any firm with monopoly
power:power:
– If EIf Edd is large, markup is smallis large, markup is small
– If EIf Edd is small, markup is largeis small, markup is large

17. Elasticity of Demand and PriceElasticity of Demand and Price
MarkupMarkup
P*
MR
D
$/Q
Quantity
MC
Q*
P*-MC
The more elastic is
demand, the less the
markup.
D
MR
$/Q
Quantity
MC
Q*
P*
P*-MC

18. Price DiscriminationPrice Discrimination
 Selling the same or slightly differentiatedSelling the same or slightly differentiated
product to different sections ofproduct to different sections of
consumers at different pricesconsumers at different prices
– E.g., railways charge lower fares fromE.g., railways charge lower fares from
children/elderly peoplechildren/elderly people

19. Degree of Price DiscriminationDegree of Price Discrimination
Refers of price discrimination refers toRefers of price discrimination refers to
the extent to which a seller canthe extent to which a seller can
divide the market or the consumersdivide the market or the consumers

20. Degree of Price DiscriminationDegree of Price Discrimination
 First Degree – when monopolist can charge differentFirst Degree – when monopolist can charge different
price from each consumer as per the willingness toprice from each consumer as per the willingness to
paypay
e.g. - medical service – doctor charges fee as pere.g. - medical service – doctor charges fee as per
patient’s ATPpatient’s ATP
 Second Degree- when monopolist divides the potentialSecond Degree- when monopolist divides the potential
buyers into blocks and sells in blocks at differentbuyers into blocks and sells in blocks at different
pricesprices
e.g. utility services like electricity, water supplye.g. utility services like electricity, water supply
 Third Degree – when monopolist sets different pricesThird Degree – when monopolist sets different prices
in different markets separated from each other andin different markets separated from each other and
with different elasticity of demandwith different elasticity of demand
e.g – selling the same organic apples in two differente.g – selling the same organic apples in two different
marketsmarkets

21. RecapRecap
 CharacteristicsCharacteristics
 AR and MRAR and MR
 Profit and LossProfit and Loss
 Shutdown decisionShutdown decision
 Monopoly powerMonopoly power
 Price discriminationPrice discrimination