Intro to Microeconomics Chapter 13 (Monopoly)

a market with a single firm that produces a good or service for which no good substitute exists and that is protected by a barrier that prevents other firms from selling that good or service

because there are no close substitutes for the product the monopolist sells and because there are barriers (natural, ownership, or legal) to entry to the market

a monopoly created by a natural barrier to entry in the market (high FC and low MC)
economies of scale along the firm's entire LRAC allow one firm to supply the entire market at the lowest possible cost
ex: tap water or electricity companies

a barrier to entry in a market when the monopolist owns a huge amount of a key resource of production

a monopoly created by a legal barrier to entry in the market
a public franchise, government license, copyright, or patent has been granted to the monopolist

monopolies set their own price, but to sell a larger quantity they must set a lower price

single price monopolies OR monopolies that use price discrimination

by setting a lower price for a group of consumers, the firm looks like it is doing consumers a favor
BUT, it is actually charging the highest possible price for each unit sold and making the largest possible profit

TR - TC = Q(P - ATC)

TR = P × Q
total revenue = price × quantity sold

MR = ∆TR / ∆Q
marginal revenue = change in total revenue / change in output

marginal revenue is always less that price because it is below the demand curve

same y-intercept as the demand curve
twice the slope

elasticity greater than 1
a 1 percent fall in price brings a greater than 1 percent increase in demand
fall in price brings increase in total revenue; MR is positive

elasticity of 1
a 1 percent fall in price brings a 1 percent increase in the quantity demanded
total revenue is unchanged; MR is ZERO

elasticity less than 1
a 1 percent fall in price brings a less than 1 percent increase in quantity demanded
fall in price brings decrease in total revenue; MR is negative

unit elastic at the middle
elastic above the unit elastic point
inelastic below the unit elastic point

TR is a parabola with a maximum and MR is its derivative so it is a downward-sloping line that equals 0 where TR reaches its max
so, where demand in elastic, TR is increasing and MR is positive
where demand is unit elastic, TR is at its max and MR is 0
where demand is inelastic, TR is decreasing and MR is negative

it is always elastic because monopolies are price-setters and will never price where total revenue will decrease

just like those of perfect competition

increases to a maximum and then decreases because economic profit = TR - TC and although both TR and TC increase as output increases, TC rises at an increasing rate and TR rises at a decreasing rate

that which maximizes profit
the point where MR = MC

once they have figured out the output where MR = MC, they will travel up the graph to the demand curve and charge the price at that output point

it is a rectangle with output as the width and the difference between price (found on demand curve) and ATC as the length

keep in mind that MR = MC at the best price
competitive market: MR = price = MC
monopoly: MR < price, so MC < price

maybe costs would rise, so economic profit would become economic losses

in perfect competition, each firm's supply curve is its marginal cost curve and the market supply curve is a sum of all these supply curves
so, the market supply curve becomes the monopoly's MC curve

when the market was perfectly competitive, price was found where the market supply curve equaled market demand; THEN, each firm maximized its profit by producing the output at which its MC equaled this price
now that there is a monopoly, the demand curve has not changed and the supply curve becomes the MC curve; the point where MC intersects MR becomes the output and the price is found at this point on the demand curve

compared to the perfectly competitive market, the single-price monopoly produces a smaller output and charges a higher price

perfect competition is efficient because demand = MSB and supply = MSC and thus at equilibrium MSB will equal MSC
monopoly is NOT efficient because there is a deadweight loss since we are producing at a point where MSB exceeds MSC (in terms of output, underproduction); also, it does not produce at the lowest possible long-run average cost

no, because price is greater than marginal cost

no, because price is greater than the minimum of the ATC

the deadweight loss of a monopoly

because the chance at becoming a monopolist acts as an incentive for innovation
static inefficiency leads to dynamic efficiency

it is the area of the triangle with its point at the intersection of demand and MC with its base equal to (the price on the demand curve at the chosen output) - (the price where MR = MC)

the area below price and above MC BUT excluding DWL

not only does a monopoly bring about a social loss (the deadweight loss), but it also redistributes some CS to PS

pg 308-309, 312

by redistribution of consumer surplus to profit
since they are tricking consumers into paying as close as possible to their willingness to pay using correlations in willingness to pay among groups of people

discriminate by categorizing people into groups with similar elasticities of demand
the more elastic the demand, the lower the price offered to the consumer

no, sometimes it's just because there is a lower cost of production for production in bulk
but, let's say we have a buy one get one half off sale. this is probably second degree price discrimination

discriminate based on how much is bought

when a monopoly is able to sell each unit of output for the highest price anyone is willing to pay for it
all consumer surplus is eliminated
the market demand curve becomes the marginal revenue curve, which is equal to price
output increases to the point where MC intersects the demand curve (the same output as perfect competition)
of course I will not sell to anyone willing to pay less than my MC

yes, because deadweight loss equals 0
TS equals the TS of perfect competition, except that it is entirely made up of PS
so it is efficient but NOT equitable

the political and regulatory process seeks out inefficiency and introduces regulation that eliminates deadweight loss and allocates resources efficiently

regulation serves the self-interest of the producer, who captures the regulator and maximizes economic profit

price caps
rate of return regulation: firm's return on capital cannot exceed a certain rate
marginal cost pricing rule: must set price equal to marginal cost so MB = MC; firm incurs loss
government subsidy to cover economic loss can accompany marginal cost pricing
average cost pricing rule: set price equal to average total cost; firm breaks even

lump sum equal to the loss
per unit subsidy so that the new marginal cost will intersect MR at Q*

they charge a two-part tariff, a price per unit PLUS a fixed fee to cover losses