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Lecture 5b: Monopoly

Lecture 5b: Monopoly. No, not the boardgame… ECN101 Professor Grob. Characteristics of a pure monopoly. Only supplier in the market No close substitute No real threat of competition. 13¢. 12¢. 11¢. 10¢. 9¢. 8¢. 7¢. 6¢. 0. 1. 2. 3. 4. 5. 6. 7. 8. Million KWHs.

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Lecture 5b: Monopoly

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  1. Lecture 5b: Monopoly No, not the boardgame… ECN101 Professor Grob

  2. Characteristics of a pure monopoly • Only supplier in the market • No close substitute • No real threat of competition

  3. 13¢ 12¢ 11¢ 10¢ 9¢ 8¢ 7¢ 6¢ 0 1 2 3 4 5 6 7 8 Million KWHs Natural monopolies capture economies of scale Hypothetical electric utility's cost curve B A ATC

  4. 4,400 4,000 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of diamonds A monopolist faces a downward sloping demand and marginal revenue curve Demand and revenue schedules for a monopolist $ Quantity Price Total Marginal (dollars) Revenue Revenue 0 4,000 0 0 1 3,600 3,600 3,600 2 3,200 6,400 2,800 3 2,800 8,400 2,000 4 2,400 9,600 1,200 5 2,000 10,000 400 6 1,600 9,600 -400 Demand = Price MR

  5. 4,400 4,000 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of diamonds A monopolist is a price MAKER DEMAND= PRICE MR

  6. 4,400 4,000 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of diamonds A monopoly maximizes profits by selling output where MR=MC and setting price high. MC ATC DEMAND= PRICE MR

  7. 4,400 4,000 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of diamonds A monopoly maximizes profits by selling output where MR=MC and setting price high. MC ATC DEMAND= PRICE MR

  8. 4400 4400 4000 4000 3600 3600 3200 3200 2800 2800 2400 2400 2000 2000 1600 1600 1200 1200 800 800 400 400 0 0 0 1 2 3 4 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Diamonds Quantity of Diamonds Profit maximization and loss minimization for a monopolist Profit maximization Loss minimization $ $ Losses = $1,600 Profits = $3,200 MC MC A ATC A B ATC AVC C B Demand = Price Demand = Price MR MR

  9. AGAINST Prices high Quantity low Profits abnormally high Poor service Promotes inequality Wastes resources Discourages other entreprenuers FOR Can often produce more for lower price Can invest in more R&D and take a long view Need to reward innovators with patents The case for and against monopolies

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