Chapter 7 "Monopoly", after reading this chapter, you should be able to: Define what a monopoly is, explain why price exceeds marginal revenue in monopoly, describe how a monopoly sets output and price, illustrate how monopoly and competitive outcomes differ, discuss the pros and cons of monopoly structures. | Chapter 7 Monopoly Monopoly Structure: Monopoly A monopoly is one firm that produces the entire market supply of a particular good or service. Because there is only one firm in a monopoly industry, the firm is the industry. 7- If another firm entered this industry, it would no longer be a monopoly. Monopoly = Industry In a monopoly structure, the firm’s demand curve is identical to the market demand curve for the product. 7- The monopolists’ demand curve is downward-sloping since the monopolist is the industry. Price versus Marginal Revenue Marginal revenue (MR) is the change in total revenue that results from a one-unit increase in quantity sold. Price equals marginal revenue only for perfectly competitive firms. Marginal revenue is always less than price for a monopolist. 7- Because a monopolist must decrease price in order to sell one more unit, marginal revenue is always less than price for a monopolist. A monopolist can sell additional output only if it reduces prices. The MR curve lies below the demand curve at every point but the first. Price versus Marginal Revenue 7- The MR curve decreases twice as fast as price. Figure 7- Note that MR descends twice as fast as the line labeled Demand=price. Profit Maximization A monopolist: Makes pricing decisions that perfectly competitive firms cannot make. Uses the profit-maximization rule to determine its rate of output. Maximizes profit at the rate of output where MR = MC. 7- Notice that it is MR=MC, not p=MC. For perfectly competitive industry, MR=p. For monopoly (and all other structures), MR 7- This slide summarizes the difference between a perfectly competitive industry and a . | Chapter 7 Monopoly Monopoly Structure: Monopoly A monopoly is one firm that produces the entire market supply of a particular good or service. Because there is only one firm in a monopoly industry, the firm is the industry. 7- If another firm entered this industry, it would no longer be a monopoly. Monopoly = Industry In a monopoly structure, the firm’s demand curve is identical to the market demand curve for the product. 7- The monopolists’ demand curve is downward-sloping since the monopolist is the industry. Price versus Marginal Revenue Marginal revenue (MR) is the change in total revenue that results from a one-unit increase in quantity sold. Price equals marginal revenue only for perfectly competitive firms. Marginal revenue is always less than price for a monopolist. 7- Because a monopolist must decrease price in order to sell one more unit, marginal revenue is always less than price for a monopolist. A monopolist can sell additional output only if it .
