A monopoly is a market structure with a single firm that produces all output and faces no close substitutes. Barriers to entry such as control of raw materials, economies of scale, patents/copyrights, and legal restrictions prevent other firms from entering the market. A monopolist chooses its profit-maximizing quantity where marginal revenue equals marginal cost and charges the highest price consumers are willing to pay for that quantity. While monopoly may encourage innovation, it results in deadweight loss from producing less output than would be produced under perfect competition.

1. Introduction
•
•
Perfect Competition was one type of market
structure. It had to satisfy many assumptions
- some of which are not all that realistic. Now
we will look at another market structure which
is nearly he opposite of perfect competition
Monopoly - a single firm that produces all the
output in a particular market with no close
substitutes and high barriers to entry.

2. Barriers to Entry
•
•
•
Barriers to Entry are what keeps monopoly
from becoming like a perfectly competitive
market
Barriers to entry are things that prevent firms
from entering the market. Such as...
Control of Raw Materials
•
•
Example: The DeBeer’s family owns most of the
diamond mines in the world
Economies of Scale

3. Barriers to Entry (Cont.)
•
Patents and Copyrights
 Patents
- an exclusive right, granted by the
government, to market a product or
process for a period of time.
 Copyrights - an exclusive right, granted by
the government, to publish, copy or sell a
piece of music, art or literature.
•
Other Legal Restrictions
 Example:Turk
Telekom, etc.

4. Monopoly in the Short-Run
What makes monopoly different from
perfect competition is the firm’s demand
curve.
• Since the firm is the market, the firm’s
demand curve is the market demand
curve
• Hence, it’s downward sloping
•

5. Monopoly in the Short Run
•
•
A profit-maximizing monopolist, then not only
chooses how much to produce, but also
chooses what price to charge.
What prevents a monopolist from charging an
amazingly high price?

•
there may not be much demand at that price
So a monopolist wants to get the highest
price that maximizes their profit

6. Monopoly and Total Revenue
•
•
•
•
Profits = Total Revenue - Total Cost
But Total Revenue is different for a
monopolist than in perf. comp.
In perf. comp. the moreyou sell, the more the
total revenue, but now if you sell more you
have to lower your price.
Remember when we discussed elasticity, we
looked at how total revenue changes as you
move down a demand curve

7. Monopoly and Total Revenue
$
Elastic
Elasticity = 1
Inelastic
Demand
Q
$
Total Revenue
Q

8. Monopoly Profit
•
So does a monopolist want to produce
at the quantity where elasticity equals 1
and total revenue is at a maximum?
 Not
necessarily. Remember we need to
consider total cost, as well
•
The monopolist wants to maximize the
difference between total revenue and
total cost

9. Total Revenue and Total Cost
TC
$
TR
Q*
Q

10. Monopoly Profit Maximization
• Like perfect competition, this is the quantity
where the slopes of the TC and TR curves
are the same
• And also like perfect competition, this is the
quantity where MR=MC.
• But the MR curve looks different, since the
demand curve is downward sloping

11. D and MR
Qd
0
1
2
3
4
5
P ($)
10
8
6
4
2
0

12. D and MR
Qd
0
1
2
3
4
5
P ($)
10
8
6
4
2
0
TR ($)
0
8
12
12
8
0

13. D and MR
Qd
0
1
2
3
4
5
P ($)
10
8
6
4
2
0
TR ($)
0
8
12
12
8
0
MR ($)
--8
4
0
-4
-8

14. D and MR
P
$10
8
6
4
2
0
D
1
2
3
4
5
Q

15. D and MR
P
$10
8
6
4
2
0
MR
1
2
D
3
4
5
Q

16. Profit Maximizing
P
MC
$10
8
6
4
2
0
MR
1
2
D
3
4
5
Q

17. Profit Maximizing
P
MC
$10
8
6
4
2
0
MR
1
2
D
3
4
5
Q

18. Profit Maximizing
•
•
•
•
So the monopolist chooses the quantity
where MC=MR (a quantity of 2, in this
example)
If they chose less, MR>MC so they could get
more money from selling one more than it
would cost to make one more.
But they also get to choose the price
They choose the highest price they can
charge in order to sell Q*

19. Profit Maximizing
P
MC
$10
8
6
4
2
0
MR
1
2
D
3
4
5
Q

20. Profit Maximizing
The price is found by looking to the
demand curve and finding the price
people are will to pay in order to buy the
quantity the firm wants to produce
• In the case of this example, this is a
price of about $6.50
• How do we show the profit in this case?
•

21. Profit Maximizing
P
MC
$10
ATC
AVC
8
6
4
2
0
MR
1
2
D
3
4
5
Q

22. Profit Maximizing
P
MC
$10
ATC
AVC
8
p*
6
atc*
4
2
0
MR
1
2
D
3
4
5
Q

23. Profit Maximizing
P
MC
$10
ATC
AVC
8
p*
6
atc*
Profit
4
2
0
MR
1
2
D
3
4
5
Q

24. Shut Down Rules
•
•
•
A monopolist faces the same short run shut
down rules as a perfectly competitive firm for
all of the same reasons
As long as P>AVC, the firm is paying off
some fixed cost and should stay open in the
short run
If P<AVC, the firm should shut down. Just
because the firm is a monopolist, does not
guarantee a profit.

25. A Monopolist Who Should
Shut Down
ATC
AVC
P
MC
$10
atc*
8
p*
6
4
2
0
MR
1
2
D
3
4
5
Q

26. Profit Maximizing
•
•
Q* - where MR = MC (profit maximization)
P* - highest P consumers are willing and able
to pay for Q*
•
•
Demand curve at Q*
In the Short-Run a Monopolist may
•
•
•
Make Profits
Break Even
Operate at a Loss

27. Profit Maximizing
•
Note that a Monopolist always Operates
on Elastic Portion of Demand Curve
•
•
•
Profit Maximizing - MR = MC
MC > 0 always
MR > 0 when demand is elastic

28. Benefits of Monopoly
•
Technological Innovations
•
Incentive for monopoly profits gives firm an
incentive to innovate.

29. Costs of Monopoly
•
To begin to understand the costs of
monopoly, we need to introduce
another concept
 Producer
•
Surplus
Producer Surplus - the revenue
received by the firm above the marginal
cost

30. Producer Surplus
P
MC
p
Q
Q

31. Producer Surplus
P
MC
p
The Shaded
Area is the
Producer
Surplus
Q
Q

32. Comparison of Monopoly and
Perfect Competition
•
We can compare Monopoly and Perfect
Competition by looking at the total
amount of social surplus (consumer
surplus plus producer surplus)
generated by both and then comparing
them.

33. Monopoly vs Perfect Comp.
P
MC
MR
P
P
Monop
perf comp
D
0
Q
Monop
Q
perf comp
Q

34. Monopoly vs Perfect Comp.
P
MC
MR
P
P
Monop
perf comp
Total Surplus
for Perfect
Competition
D
0
Q
Monop
Q
perf comp
Q

35. Monopoly vs Perfect Comp.
P
MC
MR
P
P
Monop
perf comp
Total Surplus
for Monopoly
D
0
Q
Monop
Q
perf comp
Q

36. Dead Weight Loss
If we take the difference between the
total social surplus under perfect
competition and subtract the total
surplus under monopoly we find the
dead weight loss
• This is the loss in surplus to consumers
and producers from having a monopoly
•

37. Monopoly vs Perfect Comp.
P
MC
MR
P
P
The area of this triangle
is the dead weight loss
Monop
perf comp
D
0
Q
Monop
Q
perf comp
Q

38. Disadvantages of Monopoly
•
Inefficient Allocation of Resources
•
•
Allocatively Inefficient (P > MC)
Productively Inefficient (P not = min ATC)