Monopoly - Coggle Diagram
A Monopoly’s Revenue
TR/Q = AR = P
DTR/DQ = MR
P Q = TR
A monopolist’s marginal revenue is always less than the price of its good
The demand curve is downward sloping.
When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.
When a monopoly increases the amount it sells, it has two effects on total revenue (P Q).
The output effect—more output is sold, so Q is higher.
The price effect—price falls, so P is lower.
A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
If MR>MC – produce more
If MR<MC – produce less
Comparing Monopoly and Competition
For a competitive firm, price equals marginal cost.
P = MR = MC
For a monopoly firm, price exceeds marginal cost.
P > MR = MC
A Monopoly’s Profit
Profit equals total revenue minus total costs.
Profit = (TR/Q - TC/Q) Q
Profit = (P - ATC) Q
Profit = TR - TC
The monopolist will receive economic profits as long as price is greater than average total cost.
THE WELFARE COST OF MONOPOLY
Total surplus - economic well-being of buyers & sellers in a market
Sum of consumer surplus & producer surplus
Consumers’ willingness to pay for a good
Minus the amount they actually pay for it
Amount producers receive for a good
Minus their costs of producing i
In contrast to a competitive firm, the monopoly charges a price above the marginal cost.
The Deadweight Loss
At profit maximisation Monopoly
Produce quantity where MC = MR
Produces less than the socially efficient quantity of output
it places a wedge between the consumer’s willingness to pay and the producer’s cost.
Triangle between: demand curve and MC curve
The Inefficiency of Monopoly
The monopolist produces less than the socially efficient quantity of output.
The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax.
monopoly firm is a price maker.
The fundamental cause of monopoly is barriers to entry
Barriers to entry have three sources:
Ownership of a key resource.
The government gives a single firm the exclusive right to produce some good.
Costs of production make a single producer more efficient than a large number of producers.
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
A natural monopoly arises when there are economies of scale over the relevant range of output.
Monopoly versus Competition
Faces a downward-sloping demand curve
Is a price maker
Is the sole producer
Reduces price to increase sales
Faces a horizontal demand curve
Is a price taker
Is one of many producers
Sells as much or as little at same price
PUBLIC POLICY TOWARD MONOPOLIES
Government responds to the problem of monopoly in one of four ways.
Regulating the behavior of monopolies.
Turning some private monopolies into public enterprises.
Making monopolized industries more competitive
Doing nothing at all.
Price discrimination is the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
Lessons from price discrimination
Charges each customer a price closer to his or her willingness to pay
Sell more than is possible with a single price
Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price.
In order to price discriminate, the firm must have
some market power.
Requires the ability to separate customers according to their willingness to pay
Perfect Price Discrimination
Perfect price discrimination refers to the situation when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.
Perfect price discrimination
Monopolist - gets the entire surplus (Profit)
Charge each customer a different price
No deadweight loss
Without price discrimination
Single price > MC
Producer surplus (Profit)
Examples of Price Discrimination