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Understanding Pure Monopoly Economics

Learn about Pure Monopoly characteristics, market conditions, price determination, profitability, and price discrimination. Explore monopolist's profit maximization strategies. Understand impact of costs on output and efficient pricing in monopolies.

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Understanding Pure Monopoly Economics

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  1. Chapter 12 – Pure Monopoly • What are the characteristics of Pure Monopoly? • Single seller • No close substitutes • Blocked entry

  2. Chapter 12 – Pure Monopoly • What are the market conditions that create a Pure Monopoly? • Barriers to Entry: Economies of Scale Patents and licenses Others on p. 257

  3. A monopoly is a price maker. What does this mean? Because the firm is the entire industry, it decides output levels for the entire market. It then sets price based on market demand for the product at that level of output. Price • P1 • P2 • D The demand curve, for the monopoly is downward sloping. 0 • Q2 • Q1 • Quantity

  4. Marginal Revenue and Price • In monopoly, price and marginal revenue are not the same. • This is because of the monopoly’s downward-sloping demand curve. • To increase output, the monopolist must lower price, not just for the next unit, but for all units.

  5. Marginal Revenue and Price • Example: if the monopolist could sell 10 units at $100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit? • 10 x 100 = $1000 • 11 x 99 = $1089 • Total revenue goes up by $89, so marginal revenue is $89, not the $99 price.

  6. For a monopoly, marginal revenue is always less than price. Price • Demand • Marginal Revenue 0 • Quantity

  7. How does a monopolist maximize profit? Set output where MR = MC. Price • MC • D • MR 0 • QM • Quantity

  8. What price does the monopolist charge? Follow the quantity where MR = MC up to the demand curve. Price • MC • PM • D • MR 0 • QM • Quantity

  9. Notice the inefficiency in a monopoly: Output is less than where MC = Demand (MB to consumers) Price is greater than marginal cost. Price • MC • PM • D • MR 0 • QM • Quantity

  10. What is the area of profit or loss for the monopolist? Price • MC • ATC • PM Profit • D • MR 0 • QM • Quantity

  11. Does the monopolist always make a profit? Price • MC • ATC • PM Loss • D • MR 0 • QM • Quantity

  12. And finally, what happens to output when a monopoly’s costs change? • MC Price • ATC • PM • P2 • D • MR 0 • QM • Q2 • Quantity

  13. For the profit-maximizing monopolist, identify: Output b. Price c. Total Profit d. Socially optimal (allocatively efficient) output e. Socially optimal (efficient) price at profit-maximizing output.

  14. End Part 1

  15. Price Discrimination Price($) MC Consumer Surplus ATC • PM Producer Surplus Deadweight Loss Demand Marginal Revenue • 0 • QM • QUANTITY

  16. Price Discrimination • Conditions: A. Monopoly power. B. Market segregation: separate your customers into groups based on how much they’re willing to pay. C. No resale (customers cannot re-sell their purchase to someone else at the higher price). II. Results: A. Firm can charge each customer as much as they are willing to pay. B. Increases profit and output. C. Decreases consumer surplus (perfect price discrimination completely eliminates consumer surplus).

  17. Price Discrimination Examples? Price($) MC ATC • PM • PD Demand Marginal Revenue • 0 • QM • QD • QUANTITY

  18. Perfect Price Discrimination Examples? Total Revenue is the whole shaded area. Price($) MC ATC • PM Demand Marginal Revenue • 0 • QM • QD • QUANTITY

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