At the end of its journey, Monopoly is a business.
Explain the differences between the collective decisions of competing firms and the decisions facing a monopolist.
Determine a monopolist's price, output, and profit numerically.
Perfect competition was considered in the last chapter.
It is not the same as competition.
There are barriers to entry.
There are barriers to entry into a market that prevent competition.
In the case of a firm with a perfect monopoly that prevents other firms from entering, these can be legal barriers.
Today's enormous growth of network businesses such as Facebook is related to this final barrier.
The bigger the firm gets, the harder it is for other firms to compete.
A key difference between a competitive firm and a monopoly is answered by answering that question.
Since a competitive firm is too small to affect the price, it doesn't take into account the effect of its output decision on the price it receives.
The given market price is the marginal revenue that a competitive firm gets from selling an additional unit of output.
The marginal revenue of a monop olistic firm is not its price.
Let's look at an example.
You're the greatest thing since Rembrandt, or at least since Andy Warhol, if a traveling art critic sees your drawings in the margins of this book.
Carefully he tears each page out of the book, mounts the pages on special paper, and numbers them: Doodle Number 1 (Doodle While Contemplating Production), Doodle Number 2 (Doodle While Contemplating Production), and so on.
Why should you study instead of doing something else?
At that point, you realize that increasing production doesn't necessarily make suppliers better off, and that you need to start studying.
Competitive firms don't take advantage of that insight.
The firms collectively are not doing what is in the interest of the firms individually.
Consumers benefit when one supplier is competing against another.
Monopolists do what is in their best interest in monopolistic markets.
Monopolists can see that consumers don't benefit.
Changing output has an effect on the total profit of the monopolist.
We do that in this section.
First, we look at a numerical example, then we look at the same example graphically.
Table 14-1 contains the relevant information for our example.
Table 14-1 shows the price, total revenue, marginal revenue, total cost, marginal cost, average total cost, and profit at various levels of production.
In the last chapter, we determined a competitive firm's output.
The price is not equal to the marginal revenue that changes as output changes.
Marginal revenue is the change in total revenue associated with a change in quantity.
Monopolist increases output from 4 to 5, the price it can charge falls from $24 to $21, and its revenue increases from $96 to $105, so marginal revenue is $9.
Increasing output from 4 to 5 for the monopolist will result in a $21 gain in revenue and a $12 decline in revenue because the monopo list must lower the price on the previous 4 units it produces by $3 a unit.
The key characteristic of a monopolist is its output decision.
Monop olist's marginal revenue is always below its price because an increase in output lowers the price on all previous units.
A monopolist's marginal revenue can confirm that this is true.
Let's see if the monopolist will increase production from 4 to 5 units.
The marginal cost of increasing output from 4 to 5 is $16 and the marginal revenue is $9.
Increasing production from 4 to 5 will reduce total profit and the monopolist will not increase production.
It won't reduce output from 4 to 3.
Since it can't increase total profit by increasing output to 5 or decreasing output to 3, it's maximizing profit at 4 units.
Table 14-1 explains why 4 is priced at $24.
The firm has revenue of $81 for 3 units of output and a price of $27.
The firm has a total revenue of $105 and a total cost of 78, both for a profit of $27, at 5 units of output and a price of $21.
When it produces 4 units, the firm earns $34, which is the highest profit it can make.
This is the profit-maximizing level.
The output decision of the monopolist can be seen graphically.
The marginal cost curve shows the change in the firm's total cost as output changes.
The same curve was seen in our discussion of perfect competition.
When quantity changes, the marginal revenue curve shows the change in total revenue.
The points given by quantity and marginal revenue are plotted and connected.
The marginal revenue curve for a monopolist is new.
The firm will get more revenue by expanding output.
There is a trick to help you graph the marginal revenue curve.
The price axis is to the halfway mark.
The marginal revenue is positive until the firm produces 6 units.
After 6 units the firm's total revenue decreases when output increases.
There is a relationship between the demand curve and the marginal revenue curve.
The marginal revenue curve is below the average curve because of the down ward-sloping demand curve.
The marginal cost curve and marginal revenue curve are the key curves to look at.
It makes sense to charge a price for marginal output.
It makes sense to reduce production if the marginal revenue is below the marginal cost.
It decreases marginal cost and increases marginal revenue.
Increasing or decreasing production doesn't make sense if the marginal revenue is the same as the marginal cost.
The general rule is that any firm must pay for that quantity.
Figure 14-1 shows how a monopolist market supply curve would affect output and price in a perfectly competitive industry.
If a market is made into a monopoly, output would be lower and price would be higher.
The effect that restricting output has on price is taken into account by the monopo list.
We've covered a lot of material quickly, so it's helpful to go through an example slowly and carefully.
The monopolist would choose the price.
The table only tells us the marginal cost and marginal revenue of moving from 3 to 4 and the marginal cost, not the actual cost, since the table only tells us the marginal cost and marginal revenue of moving from 3 to 4 and the marginal cost, not the actual cost.
The marginal cost and marginal revenue would be $12 if small adjustments were possible.
The qualifications are best left to intermediate classes.
It can be difficult to determine a monopolist's price and output.
The steps shown in the figure are discussed in the text.
Try to go through the steps on your own, and then check your work with the text to make sure you understand.
The quantity line intersects the demand curve.
The monopolist's profit can only be determined by comparing average total cost to price.
The average total cost curve is needed before we can determine profit.
It's important to follow the cor rect sequence when finding profit, as we saw with a perfect competitor.
The output of the monopolist will be determined by the intersection of the marginal cost and marginal revenue curves.
Determine the price the monopolist will charge for that output.
The monopolist's profit (loss) can be determined by subtracting average total earns.
The monopolist will make a profit if price exceeds average total cost.
The monopolist will incur a loss if price is less than average cost.
The output level at which marginal cost is equal to marginal revenue is the Sec ond step.
Draw a line from that point to the horizontal axis.
The monopolist will charge at that output.
The average total cost is the fourth step in our Finding a Monopolist.
The average cost is the monopolist's chosen output.
The marginal revenue curve can be drawn.
Determine the output of the monopolist.
Monopolists don't always make a profit.
Two other average total cost curves demand curves are considered in Figure 14-4.
The monopolist's price is where this line intersects to show you that a monopolist may make a loss.
Whether a firm is making a profit, zero profit, or a loss maximizing level of output to get profit per unit.
A monopolist can make either a profit or a total profit if they divide the profit per unit by the quantity of output.
Monopolists make a killing.
Monopolists break even or lose money.
It gives the holder a monopoly to make a good.
The cost of getting a patent is often more than the revenues from selling the product.
An example would be a self-stirring pot with a battery-operated stir rer attached to its lid.
The bottom of the pot was supposed to be protected from burning.
The Home Shopping Network was tried on by the inventor.
The inventor had a monopoly on the production and sale of the self-stirring pot, but only a loss to show for it.
This can be duplicated by the thousands.
Many monopolies make a loss because their costs exceed their revenues.
Monopolists aren't guaranteed a profit.
The economic model we're using sees monopoly as bad.
The consumer and producer surplus can be seen as a reason for the normal monopolist equilibrium and perfectly competitive equilibrium.
The welfare loss from monopoly is a Producer and consumer surplus, as shown in the graph below.
Most people don't consider the loss.
It is not a loss to society.
There are reasons economists don't like monopoly.
Other goods will be produced using B resources.
The true cost to society is not reflected in quantity.
The marginal cost of increasing output is considered a loss to society from lower than the marginal benefit of increasing output, so there's a welfare loss.
Monopolists that charge the same price to all consumers have been considered.
If a monopolist is able to charge individuals high up on the identify groups of customers who have different elasticities of demand, then prices will go up and prices will go down.