In pure competition we saw that part of the marginal cost curve is also the firm’s individual supply curve. From there, draw a horizontal line left to the vertical axis to determine the monopolist’s price. Draw a vertical line up to the demand curve. Draw a vertical line down to the horizontal axis to determine the quantity produces Find the point where marginal revenue equals marginal cost To determine what the quantity of goods a monopolist will produce and the price it will change, first create a graph with the monopolist’s demand, marginal revenue, and marginal costs curves. Just like any other firm, a monopolist produces where MC=MR (why does this maximize profit?) (Do you need a review of production and costs?) Monopolists have the same production costs as any other firm, so there is nothing new here. This is where the monopolist’s profit is maximized. Monopolists set their price at a point where demand is elastic. The Monopolist Sets Prices in the Elastic Region of Demand Monopolist (as well as firms in an oligopoly or monopolistically competitive market) are price makers, meaning that they can set their own price. If the market demand curve hits the horizontal axis at quantity = 50, then the marginal revenue curve will intersect the axis at quantity =25. The marginal revenue curve always hits the horizontal axis half way between quantity =0 and the quantity at which price = 0. Since a monopolist can only increase the quantity demanded by lowering its price, the marginal revenue curve is downward sloping and below the demand curve. This is because the monopolist demand curve is the same end the market demand curve. While purely competitive firms can sell us many units as they want for the same price, if a monopolist wants to increase the quantity it sells it must reduce the price. The firm charges the same price for each unit it sells (it does not price discriminate) The firm’s monopoly position is well protected by barriers to entry The shape of the monopolist’s demand curve is based on three assumptions: A monopolist can temporarily slash prices to drive a competitor out of business, or can block their access to production or distribution outlets. Pricing and Other Strategic Barriers to EntryĬompanies can also use stealthy (and illegal) tactics to prevent competing firms from entering the market. Try opening a gold mine to compete with a monopolist that owns all the world’s gold reserves. If a company owns most or all of an important production resource it can lock competitors out of the market. Ownership or Control of Essential Resources Giving out a small number of licenses creates an oligopoly, giving out a single license creates a monopoly. The government can also mandate that only firms with licenses are allowed to compete in a given industry. Patents are designed to give people an incentive (in this case, monopoly profits) to invest in developing new goods or technologies. If you invent a new good you can apply for a patent, which gives you a monopoly in the production of the good for a set number of years. The government can formally grant on company a monopoly by learning a patent or license. Even though its costs are low, the monopolist may still charge relatively high prices and collect economic profits. Some industries are natural monopolies because costs are minimized when one firm produces all the goods. Small producers won’t be able to match the monopolist’s price and will go out of business. If it is only efficient to produce a very large quantity of goods it is hard for new entrants to gain a toehold in the market. Let’s talk about some possible barriers to entry. In a pure monopoly, these barriers are so strong that no firms can enter the market, no matter how hard they try. Firms in small towns often have a local monopoly because there just are not that many other businesses to compete with.īarriers to Entry are what keep a monopoly from falling apart as competing firms enter the market. Some companies are near monopolies, as they produce the vat majority of the goods in a certain industry. Government run utilities, for example, are essentially monopolists. There are not many pure monopolies, but there are plenty of companies that get pretty close. Non price Competition - Goods can either be standardized or differentiated, but firms can advertise in attempt to increase demand. The monopolist is a price maker (can charge whatever price it wants) The characteristics of a pure monopoly include: A market is a pure monopoly when there is only one firm producing all of the goods.
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