Monopoly market

A monopoly is a structure in which a single supplier produces and sells a given product.

1. Monopoly Market

2. Meaning of Monopoly Market Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. Examples are public utilities and professional sports leagues.

3. Characteristics of Monopoly A single seller : the firm and industry are synonymous. Unique product : no close substitutes for the firm’s product. The firm is the price maker: the firm has considerable control over the price because it can control the quantity supplied. Entry or exit is blocked. Firm and industry : In a monopoly, market, a firm is itself an industry. Therefore, there is no distinction between a firm and an industry in such a market.

4. Why Monopolies Arise The fundamental cause of monopoly is barriers to entry . Barriers to entry have three sources: Ownership of key resource Exclusive ownership of an important resource that cannot be readily duplicated is a potential source of monopoly. Legal barriers by government Patent and copyright laws are a major source of government-created monopolies. Governments also restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. This is by far the most common source of a monopoly.

5. Continue Large economies of scale 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 Because of economies of scale, the minimum efficient scale of one firm’s plant is so large that only one firm can supply the market efficiently.

6. Demand Curve in Monopoly Monopoly demand is the industry or market demand and is therefore downward sloping. Price will exceed marginal revenue because the monopolist must lower price to boost sales and cannot price discriminate in most cases. The marginal revenue curve is below the demand curve. (MR<D)

7. Monopoly’s, Total, Average, and Marginal Revenue

8. Monopoly’s, Total, Average, and Marginal Revenue

9. Monopoly’s, Total, Average, and Marginal Revenue

10. Monopoly’s, Total, Average, and Marginal Revenue

11. Monopoly’s Demand and Marginal Revenue Curves Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 -1 -2 -3 -4 1 2 3 4 5 6 7 8

12. Monopoly’s Demand and Marginal Revenue Curves Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 -1 -2 -3 -4 Demand (average revenue) 1 2 3 4 5 6 7 8

13. Monopoly’s Demand and Marginal Revenue Curves Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 -1 -2 -3 -4 Demand (average revenue) Marginal revenue 1 2 3 4 5 6 7 8

14. Monopoly’s Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q). The output effect —more output is sold, so Q is higher. The price effect —price falls, so P is lower.

15. Price and Output Decision of a Simple Monopoly A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost . It then uses the demand curve to find the price that will induce consumers to buy that quantity .

16. Profit Maximization of a Monopoly Quantity Costs and Revenue Demand Marginal revenue

17. Profit Maximization of a Monopoly Quantity Costs and Revenue Demand Average total cost Marginal revenue Marginal cost

18. Profit Maximization of a Monopoly Quantity Costs and Revenue Demand Average total cost Marginal revenue A Marginal cost

19. Profit Maximization of a Monopoly Quantity Costs and Revenue Demand Average total cost Marginal revenue Marginal cost 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity... A

20. Profit Maximization of a Monopoly Quantity Q MAX Costs and Revenue Demand Average total cost Marginal revenue Marginal cost 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity... A

21. Profit Maximization of a Monopoly Monopoly price Quantity Q MAX Costs and Revenue Demand Average total cost Marginal revenue Marginal cost B 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity... A 2. ...and then the demand curve shows the price consistent with this quantity.

22. Profit –Maximizing Output The MR = MC rule will still tell the monopolist the profit – maximizing output. The monopolist cannot charge the highest price possible, it will maximize profit where TR minus TC is the greatest. This depends on quantity sold as well as on price.

23. The Monopolist’s Profit The monopolist will receive economic profits as long as price is greater than average total cost. (P>ATC)

24. The Monopolist’s Profit Monopoly price Average total cost Quantity Q MAX Costs and Revenue Demand Marginal cost Marginal revenue Average total cost

25. The Monopolist’s Profit Monopoly price Average total cost Quantity Q MAX Costs and Revenue Demand Marginal cost Marginal revenue B C E D Monopoly profit Average total cost

26. Profit –Maximizing Output If MR > MC, the monopolist gains profit by increasing output If MR < MC the monopolist gains profit by decreasing output If MR = MC, The monopolists is maximizing profit

27. Monopoly market in short-run Three situation can be possible for a firm or Industry in short run Super-normal profits = Where P > ATC Normal profits = P = ATC Losses / minimum losses = P< ATC but P > AVC Shut down = Where P < AVC

28. NORMAL PROFITS

29. Monopoly market in Long-run In the Long-run, the monopolists can remain in business only if he is able to earn super normal profits. If he was incurring losses in short run, he has enough time to make changes in his existing plant in the long run so as to maximize his profits. The scale of his plant depends upon the position of the demand curve (AR) and its corresponding MR curve

30. Super profits in Long-run

31. Comparison between Perfectly Competitive Market and Monopoly Market Perfectly Competitive Market Monopoly Market Many buyers and sellers One seller and many buyers Both buyers and sellers are price taker Seller is a price maker and Buyer is a price taker There are homogenous product Differentiate products Free entry and exit There are Barriers Demand curve (AR) horizontal Demand curve (AR) downwards

32. Cont. P = MR = MC P > MR = MC In Long-run competitive firms earn only normal profits In Long-run monopoly firms earn Super normal profits High Competition No competitions Each firm has a sm all share of market Large market share because firm is industry

33. THE END