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Chapter Monopoly

This document discusses monopoly market structure and characteristics. It defines monopoly as a sole seller of a unique product or service with high barriers to entry. A monopoly is a price maker and sets prices to maximize revenue. Monopolies can exist due to control of resources, legal protections like patents, or natural monopoly from large economies of scale. The monopoly demand curve is the market demand curve. Marginal revenue is downward sloping for a monopoly while marginal cost is upward sloping. A monopoly produces at the quantity where marginal revenue equals marginal cost to maximize profits.

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50 views19 pages

Chapter Monopoly

This document discusses monopoly market structure and characteristics. It defines monopoly as a sole seller of a unique product or service with high barriers to entry. A monopoly is a price maker and sets prices to maximize revenue. Monopolies can exist due to control of resources, legal protections like patents, or natural monopoly from large economies of scale. The monopoly demand curve is the market demand curve. Marginal revenue is downward sloping for a monopoly while marginal cost is upward sloping. A monopoly produces at the quantity where marginal revenue equals marginal cost to maximize profits.

Uploaded by

Isya Lola
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 9

MARKET STRUCTURE:
MONOPOLY
CHARACTERISTICS OF MONOPOLY
1. The Sole Seller
• The market has only single firm that sells/ provides the only product/ service
to customers in a given market. This single firm is identical to an industry.
2. Selling Unique Product/ Service
• The product or service provided by the monopoly firm has no close
substitute.
3. High Barriers to Enter the Market
• Some firms get their monopoly power because the law prevents others from
entering the market. There is also a government agency (rather than private
individual firms) that hold the firm legally to operates the economy in
specific industry or business, that makes the firm as a monopolist.
4. Firm is Price Maker
• The price of the product or service is set by the monopolist. Because
there is no competition, the company may determine its own pricing.
The price is established by determining the quantity required to
demand the firm's targeted price (maximizes revenue).
HOW MONOPOLY EXIST
1. Resource of Control
• It occurs when a business has control over a limited physical resource.
One source of monopoly power is control over a natural resource that
is necessary for the creation of a final good.
2. Legal Prohibitions
• It refers to law(s) that limit the competition in the market. The forces
from the authority gives a single firm the exclusive right to run the
business, enable them to monopolize the market. Example, a patent
possesses by the monopolist, that makes the firm has an exclusive
right to hold the business for several years.
3. Natural Monopoly
• Natural monopoly is when the monopolist has tremendous cost
advantage that obtained from their output produced (economies of
scale) over their potential rivals
DEMAND CURVE FOR MONOPOLY
Because a monopolist is the only supplier of a product or service in the
market, the market demand curve also depicts the monopolist demand
curve. As a result, the rule of demand is held by a downward sloping
curve; price and quantity are inversely connected. It is clear that
marginal revenue (MR) does not equal price (P). (MR  P)
MARGINAL REVENUE AND
MARGINAL COST FOR MONOPOLY
• In monopoly market, the marginal cost curve is upward sloping whilst
marginal revenue is downward sloping
SHORT RUN PROFIT MAXIMIZATION
• Monopolist produce an equilibrium (profit maximization) at which the
price of a good is higher, and the quantity lower. The rule of profit
maximization for monopoly is;
• MR = MC
AR > AC; at this point of time monopolist
will earn abnormal profit
 Total Revenue = A0PQ
 Total Cost = BC0Q
 Profit = Total Revenue – Total Cost = A0PQ -
BC0Q = ABCP
AR = AC; monopolist will get zero profit
(breakeven point)
 Total Revenue = 0BPQ
 Total Cost = 0BPQ
 Profit = Total Revenue – Total Cost = 0BPQ - 0BPQ
= 0 (Zero Profit)
AR < AC; the monopolist will experience
loss

 Total Revenue = 0BPQ


 Total Cost = A0CQ
 Profit = Total Revenue – Total Cost = 0BPQ -
A0CQ = -ABCP (loss)
LONG RUN PROFIT MAXIMIZATION
• In the long-run, there is an adequate time to make changes and
adjustments in the production process.
• A monopolist will earn economic profit because of the restriction of
entry to new firms into the industry.
• Profit Maximization in the long run for monopoly market is; LRMC =
LRMR.
THE EFFICIENCY AND CONSUMER
LOSS
• An important point worth noticing is that, a monopoly chooses a higher price
and lesser quantity of output than a price taking company (P>MC). That is the
reason of why monopolist often earn abnormal profit. However, this leads to
the inefficient mix of resources in the economy (e.g.: unemployment, wasted
in raw materials and others).
• This also will affect the consumer surplus. During the perfect competition
market price (PPC), the consumer surplus was as much as AE0PPC (refer Diagram
8.6b). As in monopoly market, the consumer surplus has been taken away by
CDPMPPC and become ACPM. Thus, it creates deadweight loss in the economy,
where the potential gains did not go neither producer nor consumers (CE 0E1).
This occurs due to the inefficiency in production by the monopolist.
PRICE DISCRIMINATION
Discrimination means that treating people differently based on some
characteristic; gender, race, age group. Price discrimination is when the firm is
selling the same product/ service at different prices to different group of buyers.
Price discrimination is important for several conditions:
• Existence of monopoly power
• Existence of different markets for the same commodity
• Existence of different degrees of elasticity of demand
• Prevent resale
• Legal endorsement: Government allows the public utility firms such as electricity
to charge different prices from different customers. Normally, the industry user
would pay higher charges compared to domestic user.
There are few types of price discrimination:
a. Monopoly without price discrimination
where the firm charges the same price
(P1) to all buyers in the market, and
selling at Q1.
The consumer benefits from the price
setup by the firm (consumer surplus
area), whilst the monopolist gets more
benefit (profit) from it.
Additionally, it will cause deadweight loss
in the market since it is under production.
b. Perfect Price Discrimination
The dots along the demand curve exhibits the
willingness to pay, which is also the price of the
product/ services charges by the monopolist.
As a result, it eliminates all the benefits that should
be earned by the buyers (zero consumer surplus).
In fact, the consumer surplus has been transferred
solely as a profit to the monopolist.
Since the monopolist has no incentive to restrict
their production (output), there will be no
deadweight loss in the market.
Example, during auction where the seller charges
each buyer(s) the maximum price that he/ she
willing to pay.
In the real economy, perfect price discrimination is not possible to
occur because there is no firm in the market would know every buyer’s
willingness to pay.
Thus, the monopolist divided the customers into several groups such
as, age, gender, income level, and others.
More examples for price discrimination as follow:
Movie tickets
• Discounts for seniors, students, special discount for female only on
specific day or even, discounts on buyers for specific show time.
Airline Tickets
• The fare is different for different type of passengers based on classes
(business and economy class), lower fare at certain hours (vice versa).
Charges on public utilities
• The firm charges consumers based on public utilities such as water
bill, electricity bill, parking charges (based on hours/ day etc)

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