1

exists when a single firm is the sole producer of a product for which there are no close substitutes.

2

1. Single seller

2. No close substitutes

3. “Price maker”

4. Blocked entry

3

1. Economies of scale

2. Legal barriers

3. Ownership or control of resources

4. Strategic barriers

4

Occurs when lowest unit costs depend on the existence of a small number of larger firms or one firm.◦ New firms cannot afford to enter the market

◦ Public utilities

5

Patents provide the exclusive right to produce a product for a fixed number of years.

licenses

6

International Nickel Co. of Canada controlled 90% of world’s nickel reserves.

Professional sports leagues control player contract and leases on major city stadiums.

7

Monopoly firms use price & other strategic barriers to keep competition out of the industry.

8

3 assumptions

1. Monopoly is secured by patents, economies of scale, or resource ownership.

2. firm is not regulated by government.

3. a single‑price monopolist

9

Why?

monopolist must lower the price to sell an additional unit.

Added revenue will be price of last unit sold

10

(1)QuantityOf Output

(2)Price

(AverageRevenue)

(3)Total

Revenue(1) X (2)

(4)MarginalRevenue

(5)Average

Total Cost(6)

Total Cost(1) X (5)

(7)Marginal

Cost(8)

Profit (+)or Loss (-)

0123456789

10

$172162152142132122112102

928272

$0162304426528610672714736738720

$162142122102

826242222

-18

$190.00135.00113.33100.0094.0091.6791.4393.7597.78

103.00

$100190270340400470550640750880

1030

$90807060708090

110130150

$-100-28

+34+86

+128+140+122+74-14

-142-310

Revenue Data Cost Data

]]]]]]]]]]

]]]]]]]]]]

Can you See Profit Maximization?11

LO 8.1 12

PP

QQ

DD

132132

When price decreases When price decreases from $142 to $132, one from $142 to $132, one more unit is sold…more unit is sold…

Gain = $132Gain = $132

$142$142

1 2 3 4 5 6 1 2 3 4 5 6

Revenue will increase by $132Revenue will increase by $132with the extra unit soldwith the extra unit sold

Figure 8-2

LO 8.1 13

1 2 3 4 5 6 1 2 3 4 5 6

PP

QQ

DD

but revenue lossbut revenue loss= $10 X 3 units= $10 X 3 units

Loss = $30Loss = $30

When price decreases When price decreases from $142 to $132, onefrom $142 to $132, onemore unit is sold…more unit is sold…

Gain = $132Gain = $132Marginal revenue Marginal revenue = $132-30= $132-30= $102 < $132 (price)= $102 < $132 (price)

132132$142$142

firm controls output and price

but is not free of market forces, since the combination of output and price that can be sold depends on demand.

14

Total revenue test

15

LO 8.1 16

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18QQ

Tota

l rev

enue

Tota

l rev

enue

Pric

e pe

r uni

tPr

ice

per u

nit

200

150

200

50

750

500

250 TRTR

DD

Inelastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18QQ

MRMR

Elastic

TRTR

Figure 8-3

MR = MC rule

No supply curve

17

Cannot charge the highest price it can get◦ Profits are max where MR = MC

Total profit is the goal◦ Not unit profit

Monopolists can receive economic profits greater than zero in the long run. ◦ Losses can also occur → shut down in LR

18

Monopolist produces less

Monopolist charges higher price

P > MC

19

Productive efficiency?

Allocative efficiency?

20

More unequal

Transfer of income from consumers to business owners

21

Regulatory commission ◦ socially optimal price◦ Fair-return price

22