this would be helpful for KU students.economics slides for tu and ku.

2. In This Lecture…
 The Theory of Monopoly
 Monopoly Pricing and
Output in Short Run and
Long Run
 Social Costs of Monopoly
 Sources of Monopoly Power
 Monopoly and Consumer’s
Surplus
 Price Discrimination

3. Monopoly
A theory of market structure based on
three assumptions:
 There is one seller
 It sells a product for which no close
substitutes exist
 There are extremely high barriers to entry

4. Barriers to Entry
 Legal barriers
 Economies of scale
 Exclusive ownership of a necessary
resource

5. Legal Barriers to Entry
 Public franchises - A right granted to a
firm by government that permits the firm
to provide a particular good or service
and excludes all others from doing the
same. Thus eliminating potential
competition by law.
 The US Postal Service has been granted
the exclusive franchises to deliver first
class mail.

6. Legal Barriers to Entry
 Patents Rights are granted to inventors of
a product or process for a period of 20
years. During these years, the patent
holder is shielded from competitors; no
one else can legally produce and sell the
patented product or process.
 The rationale behind patents is that they
encourage innovation in the economy.

7. Legal Barriers to Entry
 Government licenses – required to carry
on a business or occupation
 Radio and television stations cannot
operate without a license from the
government.
 In some states a person needs to be
licensed to be a physician, dentist, nurses
etc.

8. Economies of Scale
 Economies of scale – In some industries low ATC
are only obtained through large sale production.
If new entrants are to be competitive in the
industry they must enter in large scale. But
having to produce on this scale is risky and costly
and therefore acts as a barrier
to entry.
 If economies of scale are so pronounced
in an industry that only one firm can
survive in the industry it is called a
natural monopoly.

9. Monopolist’s Demand Curve
 The monopoly firm is the industry, and the industry is
the monopoly firm—they are the same.
 It follows that the demand curve for the monopoly firm
is the market demand curve, which is downward
sloping.
 A downward-sloping demand curve posits an inverse
relationship between price and quantity demanded:
 More is sold at lower prices than at higher prices, ceteris
paribus.
 Unlike Perfectly Competitive firm, the monopolist can
raise its price and still sell its product (though not as
much).

10. Monopolist is a Price Searcher
 A seller that has the ability to control to
some degree the price of the product it
sells.
 The monopolist seeks a price which
maximizes profit.

11. Demand and Marginal Revenue
Curves
 The demand curve
plots price and
quantity.
 The marginal revenue
curve plots marginal
revenue and quantity.
 For a monopolist, P >
MR, so the marginal
revenue curve must
lie below the demand
curve.

12. Monopolist’s Profit-Maximizing
Price and Quantity of Output
The monopolist produces
the quantity of output
(Q1) at which MR= MC,
and charges the highest
price per unit at which
this quantity of output can
be sold (P1).
 Notice that at the profitmaximizing quantity of
output, price is greater
than marginal cost,
P >MC.

13. Monopoly Profits and Losses
 A monopoly seller is
not guaranteed any
profits. Here, price is
at above average total
cost at Q1, the
quantity of output at
which MR = MC.
 Therefore, TR (the
area 0P1BQ1) is
greater than TC (the
area 0CAQ1), and
profits equal the area
CP1BA.

14. Monopoly Profits and Losses
 Here, price is below
average total cost at
Q1.
 Therefore, TR (the
area 0P1AQ1) is
less than TC (the
area 0CBQ1) and
losses equal the
area P1CBA.

15. Perfect Competition and
Monopoly
 For the perfectly competitive firm, P = MR; for the
monopolist, P > MR.
 The perfectly competitive firm’s demand curve is its
marginal revenue curve; the monopolist’s demand curve
lies above its marginal revenue curve.
 The perfectly competitive firm charges a price equal to
marginal cost; the monopolist charges a price greater
than marginal cost.
Perfect competition: P = MR and P = MC
Monopoly: P > MR and P > MC

16. Consumer Surplus
The difference between the maximum price a
buyer is willing and able to pay and the
actual price paid.
CS = Maximum Buying Price - Price
Paid

17. Monopoly, Perfect Competition,
and Consumers’ Surplus
 If the market in the exhibit is
perfectly competitive, the
demand curve is the marginal
revenue curve. The profit
maximizing output is QPC and
price is PPC.
 Consumers’ surplus is the
area PPCAB.
 If the market is a monopoly
market, the profit-maximizing
output is QM and price is PM.
 Consumers’ surplus is the
area PMAC.
 Consumers’ surplus is greater
in perfect competition than in
monopoly; it is greater by the
area PPCPMCB.

18. Social Costs of Monopoly
Dead Weight Loss
 The loss of not producing the competitive
quantity of output.

19. Rent Seeking
Actions of individuals and groups who
spend resources to influence public policy
in the hope of redistributing (transferring)
income to themselves from others.

20. X-Inefficiency
The increase in costs and organizational
slack in a monopoly resulting from the
lack of competitive pressure to push costs
down to their lowest possible level.

21. Deadweight Loss and Rent Seeking as
Costs of Monopoly
 The monopolist produces QM,
and the perfectly competitive
firm produces the higher output
level QPC.
 The deadweight loss of
monopoly is the triangle (DCB)
between these two levels of
output.
 Rent-seeking activity is directed
to obtaining the monopoly
profits, represented by the area
PPCPMCD.
 Rent seeking is a socially
wasteful activity because
resources are expended to
transfer income rather than to
produce goods and services.

22. Price Discrimination
 When the seller charges different prices for the
product it sells and the price differences do not
reflect cost differences.
 Perfect Price Discrimination - seller charges the
highest price each consumer would be willing to
pay for the product rather than go without it.
 Second-Degree Price Discrimination - seller
charges a uniform price per unit for one specific
quantity, a lower price for an additional
quantity, and so on.
 Third-Degree Price Discrimination - seller
charges different prices in different markets or
charges a different price to different segments of
the buying population.

23. Conditions of Price
Discrimination
To price discriminate, the following conditions must
hold:
 The seller must exercise some control over price;
that is, it must be a price searcher.
 The seller must be able to distinguish among buyers
who would be willing to pay different prices.
 It must be impossible or too costly for one buyer to
resell the good to other buyers. The possibility of
arbitrage*, or “buying low and selling high,” must
not exist.
*Buying a good at a low price and selling the good for a higher price.

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