CHAPTER 14Monopoly

PowerPoint® Slides by Can Erbil

© 2004 Worth Publishers, all rights reserved© 2004 Worth Publishers, all rights reserved

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What you will learn in this chapter:The significance of monopoly, where a

single monopolist is the only producer of a good

How a monopolist determines its profit-maximizing output and price

The difference between monopoly and perfect competition, and the effects of that difference on society’s welfare

Problems posed by monopoly

What price discrimination is, and why it is so prevalent when producers have market power

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Types of Market Structure

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What a Monopolist Does

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Why Do Monopolies Exist?A monopolist has market power and as a result will charge higher prices and produce less output than a competitive industry. This generates profit for the monopolist in the short run and long run.

Profits will not persist in the long run unless there is a barrier to entry. This can take the form of control of natural resources or inputs, economies of scale, technological superiority, or legal restrictions imposed by governments,

including patents and copyrights.

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Economies of Scale Create Natural Monopoly

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Comparing the Demand Curves of a Perfectly Competitive Firm and a Monopolist

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A Monopolist’s Demand, Total Revenue, and Marginal Revenue Curves

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The Monopolist’s Profit- Maximizing Output and Price

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Monopoly versus Perfect CompetitionP = MC at the perfectly competitive firm’s profit-maximizing quantity of output

P > MR = MC at the monopolist’s profit-maximizing quantity of output

Compared with a competitive industry, a monopolist does the following:

Produces a smaller quantity: QM < QC

Charges a higher price: PM > PC

Earns a profit

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The Monopolist’s ProfitProfit = TR − TC

= (PM × QM) −

(ATCM × QM)

= (PM − ATCM) × QM

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Monopoly Causes Inefficiency

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Regulated and Unregulated Natural Monopoly

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Price Discrimination: Two Types of Airline Customers

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Price Discrimination: Two versus Three Different Prices

By increasing the number of different prices charged, the monopolist captures more of the consumer surplus and makes a large profit.

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Perfect Price Discrimination

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The End of Chapter 14

coming attraction:Chapter 15:

Oligopoly