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Meaning of Monopoly Market
Pure monopoly exists when a single
firm is the sole producer of a
product for which there are no
close substitutes. Examples are
public utilities and professional
sports leagues.
Characteristics of Monopoly
 A single seller: the firm and industry are synonymous.
 Unique product: no close substitutes for the firm’s product.
 The firm is the price maker: the firm has considerable
control over the price because it can control the quantity
supplied.
 Entry or exit is blocked.
 Firm and industry: In a monopoly, market, a firm is itself an
industry. Therefore, there is no distinction between a firm
and an industry in such a market.
Why Monopolies Arise
 The fundamental cause of monopoly is barriers to entry.
 Barriers to entry have three sources:
 Ownership of key resource
 Exclusive ownership of an important resource that cannot
be readily duplicated is a potential source of monopoly.
 Legal barriers by government
 Patent and copyright laws are a major source of
government-created monopolies.
 Governments also restrict entry by giving a single firm the
exclusive right to sell a particular good in certain markets.
 This is by far the most common source of a monopoly.
Continue
 Large economies of scale
 An industry is a natural monopoly when a
single firm can supply a good or service to an
entire market at a smaller cost than could two
or more firms
 Because of economies of scale, the minimum
efficient scale of one firm’s plant is so large
that only one firm can supply the market
efficiently.
Demand Curve in Monopoly
 Monopoly demand is the industry or market
demand and is therefore downward sloping. Price
will exceed marginal revenue because the
monopolist must lower price to boost sales and
cannot price discriminate in most cases.
 The marginal revenue curve is below the demand
curve. (MR<D)
Monopoly’s, Total, Average, and
Marginal Revenue
Quantity Price TotalRevenue AverageRevenue MarginalRevenue
Q P TR=PxQ AR=TR/Q MR=TR/Q
0 $11
1 10
2 9
3 8
4 7
5 6
6 5
7 4
8 3
Monopoly’s, Total, Average, and
Marginal Revenue
Quantity Price TotalRevenue AverageRevenue MarginalRevenue
Q P TR=PxQ AR=TR/Q MR=TR/Q
0 $11 $ 0
1 10 10
2 9 18
3 8 24
4 7 28
5 6 30
6 5 30
7 4 28
8 3 24
Monopoly’s, Total, Average, and
Marginal Revenue
Quantity Price TotalRevenue Average Revenue MarginalRevenue
Q P TR=PxQ AR=TR/Q MR=TR/Q
0 $11 $ 0 —
1 10 10 $10
2 9 18 9
3 8 24 8
4 7 28 7
5 6 30 6
6 5 30 5
7 4 28 4
8 3 24 3
Monopoly’s, Total, Average, and
Marginal Revenue
Quantity Price TotalRevenue AverageRevenue MarginalRevenue
Q P TR=PxQ AR=TR/Q MR=TR/Q
0 $11 $ 0 — —
1 10 10 $10 $10
2 9 18 9 8
3 8 24 8 6
4 7 28 7 4
5 6 30 6 2
6 5 30 5 0
7 4 28 4 –2
8 3 24 3 –4
Monopoly’s Demand and Marginal
Revenue Curves
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
Monopoly’s Demand and Marginal
Revenue Curves
Quantity of Water
Price
$11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
Demand
(average revenue)
1 2 3 4 5 6 7 8
Monopoly’s Demand and Marginal
Revenue Curves
Quantity of Water
Price
$11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
Demand
(average revenue)Marginal
revenue
1 2 3 4 5 6 7 8
Monopoly’s Marginal Revenue
When a monopoly increases the
amount it sells, it has two effects on
total revenue (P x Q).
The output effect—more output is
sold, so Q is higher.
The price effect—price falls, so P is
lower.
Price and Output Decision of a
Simple 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.
Profit Maximization of a Monopoly
Quantity0
Costs and
Revenue
Demand
Marginal revenue
Profit Maximization of a Monopoly
Quantity0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
Marginal
cost
Profit Maximization of a Monopoly
Quantity0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
A
Marginal
cost
Profit Maximization of a Monopoly
Quantity0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
Marginal
cost
1. The intersection of the
marginal-revenue curve
and the marginal-cost
curve determines the
profit-maximizing
quantity...
A
Profit Maximization of a Monopoly
QuantityQMAX0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
Marginal
cost
1. The intersection of the
marginal-revenue curve
and the marginal-cost
curve determines the
profit-maximizing
quantity...
A
Profit Maximization of a Monopoly
Monopoly
price
QuantityQMAX0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
Marginal
cost
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.
Profit –Maximizing Output
The MR = MC rule will still tell the
monopolist the profit – maximizing
output. The monopolist cannot charge
the highest price possible, it will
maximize profit where TR minus TC is
the greatest. This depends on quantity
sold as well as on price.
The Monopolist’s Profit
The monopolist will receive economic
profits as long as price is greater than
average total cost.
(P>ATC)
The Monopolist’s Profit
Monopoly
price
Average
total cost
QuantityQMAX0
Costs and
Revenue
Demand
Marginal cost
Marginal revenue
Average total cost
The Monopolist’s Profit
Monopoly
price
Average
total cost
QuantityQMAX0
Costs and
Revenue
Demand
Marginal cost
Marginal revenue
B
C
E
D
Monopoly
profit
Average total cost
Profit –Maximizing Output
If MR > MC, the monopolist gains profit by
increasing output
If MR < MC the monopolist gains profit by
decreasing output
If MR = MC, The monopolists is maximizing
profit
Monopoly market in short-run
Three situation can be possible for a firm or Industry in
short run
1. Super-normal profits = Where P > ATC
2. Normal profits = P = ATC
3. Losses / minimum losses = P< ATC but P > AVC
4. Shut down = Where P < AVC
NORMAL PROFITS
Monopoly market in Long-run
 In the Long-run, the monopolists can remain in
business only if he is able to earn super normal profits.
 If he was incurring losses in short run, he has enough
time to make changes in his existing plant in the long
run so as to maximize his profits.
 The scale of his plant depends upon the position of the
demand curve (AR) and its corresponding MR curve
Super profits in Long-run
Comparison between Perfectly Competitive
Market and Monopoly Market
Perfectly Competitive Market Monopoly Market
Many buyers and sellers One seller and many buyers
Both buyers and sellers are price taker Seller is a price maker and Buyer is a
price taker
There are homogenous product Differentiate products
Free entry and exit There are Barriers
Demand curve (AR) horizontal Demand curve (AR) downwards
Cont.
P = MR = MC P > MR = MC
In Long-run competitive firms earn
only normal profits
In Long-run monopoly firms earn
Super normal profits
High Competition No competitions
Each firm has a small share of market Large market share because firm is
industry
THE END

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Monopoly market

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  • 2. Meaning of Monopoly Market Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. Examples are public utilities and professional sports leagues.
  • 3. Characteristics of Monopoly  A single seller: the firm and industry are synonymous.  Unique product: no close substitutes for the firm’s product.  The firm is the price maker: the firm has considerable control over the price because it can control the quantity supplied.  Entry or exit is blocked.  Firm and industry: In a monopoly, market, a firm is itself an industry. Therefore, there is no distinction between a firm and an industry in such a market.
  • 4. Why Monopolies Arise  The fundamental cause of monopoly is barriers to entry.  Barriers to entry have three sources:  Ownership of key resource  Exclusive ownership of an important resource that cannot be readily duplicated is a potential source of monopoly.  Legal barriers by government  Patent and copyright laws are a major source of government-created monopolies.  Governments also restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.  This is by far the most common source of a monopoly.
  • 5. Continue  Large economies of scale  An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms  Because of economies of scale, the minimum efficient scale of one firm’s plant is so large that only one firm can supply the market efficiently.
  • 6. Demand Curve in Monopoly  Monopoly demand is the industry or market demand and is therefore downward sloping. Price will exceed marginal revenue because the monopolist must lower price to boost sales and cannot price discriminate in most cases.  The marginal revenue curve is below the demand curve. (MR<D)
  • 7. Monopoly’s, Total, Average, and Marginal Revenue Quantity Price TotalRevenue AverageRevenue MarginalRevenue Q P TR=PxQ AR=TR/Q MR=TR/Q 0 $11 1 10 2 9 3 8 4 7 5 6 6 5 7 4 8 3
  • 8. Monopoly’s, Total, Average, and Marginal Revenue Quantity Price TotalRevenue AverageRevenue MarginalRevenue Q P TR=PxQ AR=TR/Q MR=TR/Q 0 $11 $ 0 1 10 10 2 9 18 3 8 24 4 7 28 5 6 30 6 5 30 7 4 28 8 3 24
  • 9. Monopoly’s, Total, Average, and Marginal Revenue Quantity Price TotalRevenue Average Revenue MarginalRevenue Q P TR=PxQ AR=TR/Q MR=TR/Q 0 $11 $ 0 — 1 10 10 $10 2 9 18 9 3 8 24 8 4 7 28 7 5 6 30 6 6 5 30 5 7 4 28 4 8 3 24 3
  • 10. Monopoly’s, Total, Average, and Marginal Revenue Quantity Price TotalRevenue AverageRevenue MarginalRevenue Q P TR=PxQ AR=TR/Q MR=TR/Q 0 $11 $ 0 — — 1 10 10 $10 $10 2 9 18 9 8 3 8 24 8 6 4 7 28 7 4 5 6 30 6 2 6 5 30 5 0 7 4 28 4 –2 8 3 24 3 –4
  • 11. Monopoly’s Demand and Marginal Revenue Curves 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
  • 12. Monopoly’s Demand and Marginal Revenue Curves Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 Demand (average revenue) 1 2 3 4 5 6 7 8
  • 13. Monopoly’s Demand and Marginal Revenue Curves Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 Demand (average revenue)Marginal revenue 1 2 3 4 5 6 7 8
  • 14. Monopoly’s Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q). The output effect—more output is sold, so Q is higher. The price effect—price falls, so P is lower.
  • 15. Price and Output Decision of a Simple 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.
  • 16. Profit Maximization of a Monopoly Quantity0 Costs and Revenue Demand Marginal revenue
  • 17. Profit Maximization of a Monopoly Quantity0 Costs and Revenue Demand Average total cost Marginal revenue Marginal cost
  • 18. Profit Maximization of a Monopoly Quantity0 Costs and Revenue Demand Average total cost Marginal revenue A Marginal cost
  • 19. Profit Maximization of a Monopoly Quantity0 Costs and Revenue Demand Average total cost Marginal revenue Marginal cost 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity... A
  • 20. Profit Maximization of a Monopoly QuantityQMAX0 Costs and Revenue Demand Average total cost Marginal revenue Marginal cost 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity... A
  • 21. Profit Maximization of a Monopoly Monopoly price QuantityQMAX0 Costs and Revenue Demand Average total cost Marginal revenue Marginal cost 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.
  • 22. Profit –Maximizing Output The MR = MC rule will still tell the monopolist the profit – maximizing output. The monopolist cannot charge the highest price possible, it will maximize profit where TR minus TC is the greatest. This depends on quantity sold as well as on price.
  • 23. The Monopolist’s Profit The monopolist will receive economic profits as long as price is greater than average total cost. (P>ATC)
  • 24. The Monopolist’s Profit Monopoly price Average total cost QuantityQMAX0 Costs and Revenue Demand Marginal cost Marginal revenue Average total cost
  • 25. The Monopolist’s Profit Monopoly price Average total cost QuantityQMAX0 Costs and Revenue Demand Marginal cost Marginal revenue B C E D Monopoly profit Average total cost
  • 26. Profit –Maximizing Output If MR > MC, the monopolist gains profit by increasing output If MR < MC the monopolist gains profit by decreasing output If MR = MC, The monopolists is maximizing profit
  • 27. Monopoly market in short-run Three situation can be possible for a firm or Industry in short run 1. Super-normal profits = Where P > ATC 2. Normal profits = P = ATC 3. Losses / minimum losses = P< ATC but P > AVC 4. Shut down = Where P < AVC
  • 28.
  • 30. Monopoly market in Long-run  In the Long-run, the monopolists can remain in business only if he is able to earn super normal profits.  If he was incurring losses in short run, he has enough time to make changes in his existing plant in the long run so as to maximize his profits.  The scale of his plant depends upon the position of the demand curve (AR) and its corresponding MR curve
  • 31. Super profits in Long-run
  • 32. Comparison between Perfectly Competitive Market and Monopoly Market Perfectly Competitive Market Monopoly Market Many buyers and sellers One seller and many buyers Both buyers and sellers are price taker Seller is a price maker and Buyer is a price taker There are homogenous product Differentiate products Free entry and exit There are Barriers Demand curve (AR) horizontal Demand curve (AR) downwards
  • 33. Cont. P = MR = MC P > MR = MC In Long-run competitive firms earn only normal profits In Long-run monopoly firms earn Super normal profits High Competition No competitions Each firm has a small share of market Large market share because firm is industry

Editor's Notes

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