Economics and monopoly introduction Essay

Characteristics: Single seller: One firm produces all the output of a particular product No close substitutes: Product is unique and if consumers want to buy it they must buy from the monopolist. Price maker: Since the monopolist is the sole supplier of the product, it can change the price by changing output. The firm faces a downward sloping demand curve, so increasing output lowers the price, decreasing output increases the price. The firm will set a price that maximizes its profits. Blocked entry: Entry to the market is totally blocked, meaning the firm has no immediate competitors. Barriers to entry may be economies of scale, legal, technological or another type. Nonprice competition: Since it has no competitors a monopolist cannot compete on price. Therefore, to attract new consumers the firm must engage in non-price competition such as advertising and public relations campaigns to promote its product’s attributes. Examples of Monopolies? www. welkerswikinomics. com 3 Unit 2. 3. 3 Pure Monopoly Monopoly Demand as seen by a Monopolist. Three assumptions: 1) Entry is totally blocked 2) The monopolist is unregulated by any government so can charge whatever price it wants. 3) The firm is a single price seller. It sells all units of output at the same price. †¢ A monopolist faces a downward sloping Demand curve. The firm D curve is the market D curve! †¢ A monopolist can sell additional output only by lowering its price (due to the law of demand). †¢ A monopolist must lower the price of all of its output, not just the marginal units, since it is a single-price seller. †¢ As a result, as output increases, the firm’s marginal revenue falls faster than the price. www. welkerswikinomics. com 4 Unit 2. 3. 3 Pure Monopoly Monopoly Demand as seen by a Monopolist Demand and Marginal Revenue Q 0 1 P1 2 3 4 5 P2 6 7 8 9 P3 10 P 172 162 152 142 132 122 112 102 92 82 72 TR=PxQ) 0 162 304 426 528 610 672 714 736 738 720 Demand and MR for a Monopolist P MR=? TR/? Q P1 P2 P3 D=AR=P Q1 Q2 Q3 Q MR Based on the above graph, over which range of output would a monopolist NEVER produce? Why? What information is needed to determine the profit maximizing level of output for this monopolist? www. welkerswikinomics. com 5 Unit 2. 3. 3 Pure Monopoly Monopoly Demand as seen by a Monopolist Elasticity and the monopoly Demand curve: †¢ Identify the elastic range of the demand curve. †¢ Identify the inelastic range of the demand curve. P Demand and MR PED>1 P1 PED=1 Question: Why won’t a monopolist ever produce at a level of output where it is in the inelastic range of its demand curve?