Monopoly Definition and Assumptions

A market with one firm selling a unique product to many buyers, with high barriers to entry.

The firm's demand curve is the same as the market demand curve in a monopoly.

A monopoly firm is a price setter, as they can influence the market price by changing the quantity they supply.

The monopolist's marginal revenue (MR) is always less than the price (P), because to sell an additional unit, they must lower the price of all units.

The monopolist maximizes profit where marginal revenue (MR) equals marginal cost (MC).

A barrier to entry based on the cost advantages of large-scale production, where one firm can supply the entire market at the lowest cost.

A legal barrier to entry where the government grants exclusive rights to a firm to operate in a specific market.

A monopolist that sells all units of its output at the same price to all customers.

A firm that charges different prices for different units of the same good or service.

A single-price monopolist always produces less and charges a higher price compared to a perfectly competitive firm.

A monopolistic firm only produces on the elastic portion of the demand curve, where marginal revenue (MR) is positive.

Marginal revenue (MR) is always less than price (P) for a monopolist.

The point where marginal revenue (MR) equals marginal cost (MC) is the profit-maximizing output level for a single-price monopolist.

Consumer surplus (CS) and producer surplus (PS) are both smaller under monopoly compared to perfect competition, indicating a loss of overall welfare.

The section of the demand curve from the midpoint to the vertical intercept, representing the range where price elasticity of demand is greater than one.

When a firm increases output beyond the midpoint of the demand curve, marginal revenue becomes negative. This means each additional unit sold will result in a loss of revenue.

The loss of total surplus (consumer and producer surplus) due to a monopoly's restriction of output. It represents the inefficiency created by the monopoly.

The difference between the price a monopolist charges and the price that would be charged in a perfectly competitive market. This difference represents the portion of consumer surplus captured by the monopolist.

The pursuit of wealth by capturing economic rent, often through lobbying, legal maneuvering, or other means to secure a monopoly or other advantageous position in the market.

Any surplus, including consumer surplus, producer surplus, or economic profit, that is captured by an individual or firm without contributing to the production of goods or services.

A price discrimination strategy where each unit of a product is sold at a different price, capturing all consumer surplus as profit. The monopolist charges each customer their maximum willingness to pay.

A price discrimination strategy where the product is divided into blocks, and each block is sold for a different price. It allows the monopolist to capture some, but not all, of the consumer surplus.

A state where the monopolist maximizes its profit by effectively capturing all the surplus in the market. This occurs because the monopolist can extract the maximum amount they can charge each customer and leaves no consumer surplus.

Third-degree price discrimination happens when a seller charges different prices to different groups of consumers based on their price elasticity of demand. The groups can be separated based on demographics (age, gender), location, purchase time, etc.

Price discrimination is effective when the seller can divide the market into at least two groups with different price elasticities of demand.

With perfect price discrimination, a monopoly charges each consumer the maximum price they're willing to pay. This maximizes producer surplus as the firm captures all consumer surplus.

In perfect price discrimination, total revenue is calculated by adding the area of the triangle above the marginal cost (MC) curve and the area under the MC curve. This reflects the revenue generated from all units sold at their respective maximum prices.

Producer surplus (PS) is the difference between total revenue (TR) and the area under the marginal cost (MC) curve. It represents the economic profit that the firm earns.

Economic profit is the difference between total revenue (TR) and total cost (TC). It is calculated by subtracting total variable cost (TVC) and total fixed cost (TFC) from total revenue.

Regulation, typically administered by government agencies, aims to influence economic activity in an industry. It can impact prices, quantities, entry of new businesses, and other aspects.

Deregulation involves reducing or eliminating government regulations on economic activity. This can lead to greater competition and innovation but also potentially expose consumers to more risk.

Regulation designed to ensure that natural monopolies like utilities operate efficiently, preventing excessive profits while ensuring service provision.

The firm sets its price at the point where marginal cost equals marginal revenue, resulting in an output level that minimizes deadweight loss and aligns with social welfare.

In this rule, the firm's price is set at the level where average cost equals marginal cost. This leads to zero economic profit for the firm, ensuring sustainability while preventing excessive profiteering.

The monopolist justifies its pricing by demonstrating that its return on its investments doesn't exceed a predetermined target rate, preventing excessive profits.

A price cap placed on a regulated firm to ensure affordability. Its value is usually set at the price where LRAC cuts the demand curve, guaranteeing a price that covers costs.

Individuals or groups with vested interests can gain control of regulatory agencies to maximize their own profits, effectively bending regulations to their advantage.

This theory argues that the political system aims to correct inefficiencies and establish regulations that optimize resource allocation and minimize deadweight loss, leading to a more efficient market.