Chapter 11: Monopoly PDF

Chapter 11: Monopoly Monopoly market single seller for a product with no close substitutes barriers to entry Barriers to entry economies of scale actions by firms actions by government Monopolies created by government action patents and copyrights, government created fran...

Chapter 11: Monopoly Monopoly market single seller for a product with no close substitutes barriers to entry Barriers to entry economies of scale actions by firms actions by government Monopolies created by government action patents and copyrights, government created franchises, and licensing. Price elasticity and MR As noted earlier, since the demand curve facing a monopoly firms is downward sloping, MR < P MR > 0 when demand is elastic MR = 0 when demand is unit elastic MR < 0 when demand is inelastic Average revenue As in all other market structures, AR=P (note that AR = TR/Q = (PxQ) / Q = P) The price given by the demand curve is the average revenue that the firm receives at each level of output. Price Quantity TC 20 0 20 18 1 21 16 2 24 14 3 30 12 4 40 10 5 55 Price Quantity TC TR Profit=TR- =P*Q MR MC ATC TC 20 0 20 0 -20 18 1 21 18 18 1 21 -3 16 2 24 32 14 3 12 8 14 3 30 42 10 6 10 12 12 4 40 48 6 10 10 8 10 5 55 50 2 15 11 -5 Monopolist receiving positive profits Zero-profit monopolist Monopolist receiving economic loss Monopolist that shuts down in the short run Monopoly price setting There is a unique profit-maximizing price and output level for a monopoly firm. It is optimal to produce at the level of output at which MR = MC and to charge the price given by the demand curve at this output level. Charging a higher (or lower) price results in lower profits. Example: air travel Deadweight loss due to monopoly