Principles of Microeconomics Monopoly PDF

Principles of Microeconomics Monopoly (Chapter 16) Shuo Xu November 28, 2024 1/16 Characteristics of Monopoly A monopoly market has the following characteristics: I One seller and many buyers. I Product with no close substitutes....

Principles of Microeconomics Monopoly (Chapter 16) Shuo Xu November 28, 2024 1/16 Characteristics of Monopoly A monopoly market has the following characteristics: I One seller and many buyers. I Product with no close substitutes. I Significant barriers to entry. Examples of barriers to entry: I Scarce input resources. I Economies of scale. I Government support (e.g., patents, licensing). I Strategic size advantage. 2/16 Monopoly vs. Perfect Competition Key differences between monopoly and perfect competition: I Monopoly: Price maker, faces downward-sloping demand curve. I Perfect Competition: Price taker, faces horizontal demand curve. 3/16 Market Power and Demand Curve I Monopolies face the entire market demand curve. I The trade-off between: I Quantity Effect: Higher output raises revenue. I Price Effect: Lower price reduces revenue from all units sold. 4/16 Marginal Revenue and Demand Key observations: I Marginal revenue (MR) is always less than price (P) for a monopolist. I MR = 0 when demand is unit elastic. 5/16 Monopoly Pricing Rule Steps for setting price and quantity: 1. Use MR = MC to find the optimal quantity (Q ∗ ). 2. Use the demand curve to find the corresponding price (P ∗ ). 6/16 Monopoly Profit I Profit is the difference between total revenue (TR) and total cost (TC). I Formula: Profit = (P − ATC ) · Q. 7/16 Deadweight Loss of Monopoly I Monopolies produce less than the socially efficient quantity. I This results in allocative inefficiency (deadweight loss). 8/16 Price Discrimination I Price discrimination: Charging different prices to different consumers. I Types: I First-Degree: Perfect price discrimination. I Third-Degree: Group-based pricing (e.g., student discounts). 9/16 Natural Monopoly I Economies of scale lead to a single firm being more efficient. I Example: Utilities like water and electricity. 10/16 Regulation of Monopolies I Governments regulate monopolies to improve welfare: I Price caps. I Antitrust laws. I Challenges: I Price regulation can distort incentives. I Enforcement is complex. 11/16 Quick Quiz 1: Monopoly Demand Question: A monopolist faces the following demand curve: P = 50 − 2Q 1. Derive the total revenue (TR) and marginal revenue (MR) equations. 2. At what quantity is MR = 0? 12/16 Quick Quiz 2: Profit Maximization A monopolist has the cost function: TC = 100 + 5Q The market demand curve is P = 60 − Q. 1. Find the profit-maximizing price and quantity. 2. Calculate the monopolist’s profit. 13/16 Recap of Key Concepts I Characteristics of monopoly. I How monopolies set prices and quantities. I Welfare implications (deadweight loss). I Types of price discrimination. I Role of government regulation. 14/16 Discussion Questions 1. Can monopolies ever be beneficial for society? Why or why not? 2. What industries are examples of natural monopolies? Discuss their regulation. 15/16 Wrap-Up and Questions I Key takeaways: I Monopolies maximize profit where MR = MC. I Deadweight loss occurs due to reduced output. I Price discrimination can improve outcomes under certain conditions. I Any final questions? 16/16