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Monopoly Structure: Monopoly. Market power is the ability to alter the price of a good or service. A monopoly is one firm that produces the entire market supply of a particular good or service. Since there is only one firm in a monopoly industry, the firm is the industry. LO-1. - PowerPoint PPT Presentation
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Monopoly
Chapter 7Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.McGraw-Hill/Irwin
7-2
Monopoly Structure: Monopoly
• Market power is the ability to alter the price of a good or service.
• A monopoly is one firm that produces the entire market supply of a particular good or service.
• Since there is only one firm in a monopoly industry, the firm is the industry.
LO-1
7-3
Monopoly = Industry
• The firm’s demand curve is identical to the market demand curve for the product.– Market demand is the total quantity of a
good or service people are willing and able to buy at alternative prices in a given time period.
LO-1
7-4
Price versus Marginal Revenue
• Marginal revenue (MR) is the change in total revenue that results from a one-unit increase in quantity sold.
• Price equals marginal revenue only for perfectly competitive firms.
• Marginal revenue is always less than price for a monopolist.
LO-1
7-5
Price versus Marginal Revenue
• A monopolist can sell additional output only if it reduces prices.
• The MR curve lies below the demand curve at every point but the first.
LO-2
7-6
Figure 7.1
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Profit Maximization
• The monopolist uses the profit-maximization rule to determine its rate of output.
• According to the rule, a monopolist maximizes profit at the rate of output where MR = MC.
LO-3
7-8
• The profit maximization rule applies to all firms:– A perfectly competitive firm produces the
quantity where MC = MR (= p)– A monopolist produces the quantity
where MC = MR (< p)
Profit Maximization
LO-3
7-9
Figure 7.2
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The Monopoly Price
• The intersection of the marginal revenue and marginal cost curves establishes the profit-maximizing rate of output.
• The demand curve tells us the highest price consumers are willing to pay for that specific quantity of output.
• Only one price is compatible with the profit-maximizing rate of output. LO-3
7-11
Monopoly Profits
• Total profit equals profit per unit times the number of units produced.
• Profit per unit = price minus average total cost
Profit per unit = p – ATC
• Total profit = profit per unit times quantity
Total profit = (p – ATC) x q LO-3
7-12
Monopoly versus Competitive Outcomes
• A monopolist produces less and charges a higher price than would a competitive industry.
LO-4
7-13
Figure 7.3
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Barriers to Entry
• Obstacles that make it difficult or impossible for would-be producers to enter a particular market.
• Examples include patents, legal harassment, exclusive licensing, bundled products, and government franchises.
LO-4
7-15
Competition versus Monopoly
• In competition, as well as in monopoly, high prices and profits signal consumers’ demand for more output.
• In competition, the high profits attract new suppliers.
• In monopoly, barriers to entry are erected to exclude potential competition.
LO-4
7-16
• In competition, production and supplies expand, and prices slide down the market demand curve.
• In monopoly, production and supplies are constrained, and prices don’t move down the market demand curve.
Competition versus Monopoly
LO-4
7-17
• In competition, a new equilibrium is established, and average costs of production approach their minimum.
• In monopoly, no new equilibrium is established, and average costs are not necessarily at or near a minimum.
Competition versus Monopoly
LO-4
7-18
• In competition, economic profits approach zero, and price equals marginal cost throughout the process.
• In monopoly, economic profits are at a maximum, and price exceeds marginal cost at all times.
Competition versus Monopoly
LO-4
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• In competition, the profit squeeze pressures firms to reduce costs or improve product quality.
• In monopoly, there is no profit squeeze to pressure the firm to reduce costs or improve product quality.
Competition versus Monopoly
LO-4
7-20
Competition versus Monopoly
7-21
Near Monopolies
• In duopoly two firms together produce the industry output.
• In oligopoly several firms dominate the market.
• In monopolistic competition many firms each have a monopoly on its own brand image but must still contend with competing brands.
LO-4
7-22
Redeeming Qualities of Monopolies?
Monopolies could also benefit society. We must consider:
• Research and Development
• Entrepreneurial Incentives
• Economies of Scale
• Natural Monopolies
• Contestable Markets
• Structure versus behavior LO-5
End of Chapter 7
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