Principle of Microeconomics

By Yiqing Xie

1

Chapter 15

Monopoly Introduction Definition: Key difference between monopoly market and perfect competition market: Why Monopolies Arise

The main cause of monopolies is ___________________________.

Three sources of barriers to entry: 1.

2.

3. Monopoly vs. Competition: Demand Curves

P

Q

P

Q

Principle of Microeconomics

By Yiqing Xie

2

Total Revenue, Marginal Revenue and Average Revenue

Common Grounds is the only seller of cappuccinos in town.

Price Quantity Total Revenue Average Revenue Marginal Revenue

$4.5 0 $0 -- --

4 1 3.5 2 3 3 2.5 4 2 5 1.5 6

Relationship between P and AR: Relationship between P and MR:

Increasing Q has two effects on revenue: 1.

2.

P

Q

P

Q

Principle of Microeconomics

By Yiqing Xie

3

Monopoly vs. Competition: Marginal Revenue Profit Maximization

Profit Maximization Condition: Three step method for the monopolist: 1.

2.

3.

P

Q

P

Q

Cost/Revenue

Q

MR

MC

ATC

D

Principle of Microeconomics

By Yiqing Xie

4

Example (Economic Profit)

Example (Economic Loss) A Monopoly Does Not Have a Supply Curve

A competitive firm

}

}

MR

Q

MC

D

ATC

Cost/Revenue

Q

MR

MC

ATC

D

Cost/Revenue

Principle of Microeconomics

By Yiqing Xie

5

A monopoly firm

}

} Monopoly and Welfare Loss

Does monopoly promote efficiency? 1. Production Efficiency:

2. Economic Efficiency:

Perfectly Competitive Equilibrium:

Monopoly Equilibrium:

Perfect

Competition Monopoly Change

Consumer surplus

Producer Surplus Total Surplus

Cost/Revenue

Q MR

D

MC

Principle of Microeconomics

By Yiqing Xie

6

Price Discrimination

Definition:

The characteristic used in price discrimination:

Perfect Price Discrimination vs. Single Price Monopoly

Single Price Monopoly:

Perfect Price Discrimination

MR D

MC

Cost/Revenue

Q

MR

D

Cost/Revenue

Q

MC

Principle of Microeconomics

By Yiqing Xie

7

Price Discrimination – Examples

1.

2.

3.

4.

5.

Public Policy Toward Monopolies

1.

2.

3.

4.