In this chapter you will learn why some markets have only one seller, analyze how a monopoly determines the quantity to produce and the price to charge, see how the monopoly’s decisions affect economic well-being, consider the various public policies aimed at solving the problem of monopoly, see why monopolies try to charge different prices to different customers. | Monopoly Chapter 15 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly A firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes. 2 2 Why Monopolies Arise The fundamental cause of monopoly is barriers to entry. 3 5 Why Monopolies Arise Barriers to entry have three sources: Ownership of a key resource. This tends to be rare. De Beers is an example The government gives a single firm the exclusive right to produce some good. Patents, Copyrights and Government Licensing. Costs of production make a single producer more efficient than a large number of producers. Natural Monopolies 4 5 Economies of Scale as a Cause of Monopoly. Average . | Monopoly Chapter 15 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly A firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes. 2 2 Why Monopolies Arise The fundamental cause of monopoly is barriers to entry. 3 5 Why Monopolies Arise Barriers to entry have three sources: Ownership of a key resource. This tends to be rare. De Beers is an example The government gives a single firm the exclusive right to produce some good. Patents, Copyrights and Government Licensing. Costs of production make a single producer more efficient than a large number of producers. Natural Monopolies 4 5 Economies of Scale as a Cause of Monopoly. Average total cost Quantity of Output Cost 0 Monopoly versus Competition Monopoly Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales Competitive Firm Is one of many producers Has a horizontal demand curve Is a price taker Sells as much or as little at same price 12 13 Quantity of Output Demand (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve 0 Price 0 Quantity of Output Price Demand Demand Curves for Competitive and Monopoly Firms. 2 A Monopoly’s Revenue Total Revenue P x Q = TR Average Revenue TR/Q = AR = P Marginal Revenue DTR/DQ = MR 14 15 A Monopoly’s Marginal Revenue 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. 16 15 A Monopoly’s Total, Average, and Marginal Revenue Quantity (Q) Price (P) Total Revenue (TR=PxQ) Average Revenue .
