Please enable JavaScript.
Coggle requires JavaScript to display documents.
Week 10 Monopoly - Coggle Diagram
Week 10 Monopoly
Profit maximizing rule for monopolies
Profit maximizing rule for any firm is MR = MC
Under perfect competition P=MR
In monopoly P > MR
Monopoly and marginal revenue
When monopoly decreases its price in order to sell more output units two things happen
The price effect: Each additional unit will be sold at a lower price (loss for the firm)
Te output effect: more units sold (gain for the firm)
Trade off for the firm
Marginal revenue and demand
Marginal revenue line lies to the left of the demand curve
If we produce I more unit the price effect is negative as price goes down by 10.
The output effect is positive, by more than the price effect. Therefore it will maximize marginal revenue
Solutions to Monopoly
Break up the monopoly
Reduce barriers to entry (eg. foreign competition)
Regulate the market (force monopolist to establish P=MC
Do nothing
Monopolis have 3 main characteristics
Many buyers, only one seller
A unique product with no good substitutes
A product in a market with high barriers to entry
Monopolists pricing and output decisions
Perfectly competitive firms
Price takers, cannot affects price
Each firm has a horizontal demand curve
Monopoly firm
Price maker, set price by choosing output level
Faces the downward sloping demand curve for the entire industry (only restriction of monopolies). They charged you up to what you are willing to pay
Comparing demand curves
Competitive market
Monopoly
Problems with monopolies
Produces an inefficient (lower) level of output and charge inefficient (higher) prices
Monopolies give you less and charge you more
Creates deadweight loss and consumer surplus is transferred to the monopolist
Less choice for consumers
A reduction in the competitiveness of a market limits the options available to consumers. there is only one seller
Rent seeking behavior
Occurs when resources are used to secure monopoly rights throughout the political process.
Rival forms may compete to become a monopolist
How do monopolies get formed?
Natural barriers for entry
Control of resources
Alcoa owned 90% of worlds bauxite
De Beers owns nearly 70% of worlds diamond mines
Natural Monopolies
A monopoly exists because a large firm has lower costs than any potential competitors
Makes it hard for other firms to enter
High fixed costs and low marginal costs
Government created barriers for entry
Sometimes creating monopolies through patents and copyright ensures process in society
Deciding how much to produce
Monopolies decide how their output based on MR=MC, however, they set price according to the demand curve at that output point.
Contrasting competition and monopoly
Competitive markets
Many firms
Produces efficient level of output (P=MC)
Cannot earn long run economic profits
Has no market power (price taker)
Monopoly
One firm
Produces less than the efficient level of output
May earn long run economic profits
Has significant market power (price maker
