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1、Part 6, 2006 Thomson Learning/South-Western,Market Power,Chapter 13, 2006 Thomson Learning/South-Western,Monopoly,3,Causes of Monopoly,Barriers to Entry Technical Barriers to Entry Natural Monopoly Legal Barriers to Entry,4,Profit Maximization,To maximize profits, a monopoly will chose the output at
2、 which marginal revenue equals marginal costs. The demand curve is downward-sloping so marginal revenue is less than price. To sell more, the firm must lower its price on all units to be sold in order to generate the extra demand.,5,A Graphic Treatment,A monopoly will produce an output level in whic
3、h price exceeds marginal cost. Q* is the profit maximizing output level in Figure 13-1. If a firm produced less than Q*, the loss in revenue (MR) will exceed the reduction in costs (MC) so profits would decline.,6,Price,P*,C,A,E,MC,MR,AC,D,Quantity,per week,Q*,0,FIGURE 13-1: Profit Maximization and
4、Price Determination in a Monopoly Market,7,A Graphical Treatment,The increase in costs (MC)would exceed the gain in revenue (MR) if output exceeds Q*. Hence, profits are maximized when MR = MC. Given output level Q*, the firm chooses P* on the demand curve because that is what consumers are willing
5、to pay for Q*. The market equilibrium is P*, Q*.,8,Monopoly Supply Curve,With a fixed market demand curve, the supply “curve” for a monopoly is the one point where MR = MC (point E in Figure 13-1.) If the demand curve shifts, the marginal revenue curve will also shift and a new profit maximizing out
6、put will be chosen. Unlike perfect competition, these output, price points do not represent a supply curve.,9,Monopoly Profits,Monopoly profits are shown as the area of the rectangle P*EAC in Figure 13-1. Profits equal (P - AC)Q*, If price exceeds average cost at Q* 0, profits will be positive. Sinc
7、e entry is prohibited, these profits can exits in the long run.,10,Monopoly Rents,Monopoly rents: profits a monopolist earns in the long run. These profits are a return to the factor that forms the basis of the monopoly. Patent, favorable location, license, etc Others might be willing to pay up to t
8、he amount of this rent to operate the monopoly to obtain its profits.,11,Whats Wrong with Monopoly?,Profitability Monopoly power is the ability to raise price above marginal cost. Profits are the difference between price and average cost. In Figure 13-2, one firm earns positive economic profits (a)
9、while the other (b) earns zero economic profits.,12,Price,P*,AC,MC,MR,MR,AC,D,D,Quantity,per week,Q*,(a) Monopoly with Large Profits,0,Price,P*=AC,MC,AC,Quantity,per week,Q*,(b) Zero-Profit Monopoly,0,FIGURE 13-2: Monopoly Profits Depend on the Relationship between the Demand and Average Cost Curves
10、,13,Whats Wrong with Monopoly?,If monopoly rents accrue to inputs, the monopoly may appear to not earn a profit. People may also be concerned that economic profits go to the wealthy. However, as with the Navajo blanket monopoly, the profits of the low-income Navajo are coming from the more wealthy t
11、ourists.,14,Whats Wrong with Monopoly,Distortion of Resource Allocation Monopolists restrict their production to maximize profits. Since price exceeds marginal cost, consumers are willing to pay more for extra output than it costs to produce it. From societies point of view, output is too low as som
12、e mutually beneficial transactions are missed.,15,Distortion of Resource Allocation,In Figure 13-3 the monopolist is assumed to produce under conditions of constant marginal cost. Further, it is assumed that if the good where produced by a perfectly competitive industry, the long-run cost curve woul
13、d be the same as the monopolists.,16,Distortion of Resource Allocation,In this situation, a perfectly competitive industry would produce Q* where demand equals long-run supply. A monopolist produces at Q* where marginal revenue equals marginal cost. The restriction in output (Q* - Q*) is a measure o
14、f the harm done by a monopoly.,17,Price,P*,D,A,MC ( =AC),MR,B,Quantity per week,Q*,0,FIGURE 13-3: Allocational and Distributional Effects of Monopoly,18,Monopolistic Distortions and Transfers of Welfare,The competitive output level (Q* in Figure 13-3) is produced at price P*. The total value to cons
15、umers is the area DEQ*0 Consumers pay P*EQ*0. Consumer surplus is DEP*.,19,Price,P*,P*,D,A,E,MC ( =AC),MR,B,Quantity per week,Q*,Q*,0,FIGURE 13-3: Allocational and Distributional Effects of Monopoly,20,Allocational Effects,A monopolist would product Q* at price P*. Total value to the consumer is red
16、uced by the area BEQ*Q*. However, the area AEQ*Q* is money freed for consumers to spend elsewhere. The loss of consumer surplus is BEA which is often called the deadweight loss from monopoly.,21,Price,P*,P*,D,A,E,Value of transferred inputs,MC ( =AC),MR,B,Quantity per week,Q*,Q*,0,FIGURE 13-3: Allocational and Distributional Effects of Monopoly,22,Distributional Effects,In Figure 13-3 monopoly profits equal the area P*BAP
