ECON 1123 1st Edition Lecture 15 Outline of Last Lecture I Cost Industries II Pure Competition Conclusions Outline of Current Lecture I The theory of pure monopoly A Characteristics of Pure Monopoly B Monopoly Profits Current Lecture I The theory of pure monopoly A Characteristics of Pure Monopoly A single seller of a good or service with no close substitutes It CONTRASTS pure competition many seller and homogeneous products Monopolists try to maximize profits or minimize losses by following the rule marginal revenue marginal cost In monopoly the firm and industry are identical So the monopolist faces the market industry demand curve This CONTRASTS pure competitions horizontal demand schedule at some price The firms in pure competition take the price the market gives them In pure completion marginal revenue and demand will be equal In monopoly demand does not equal marginal revinue Note If the monopolist charges a uniform price for all output units then each time an additional unit is sold total revenues increases by something less than the price charged for the unit Why would total revenue not increase by the full price paid for the last unit sold Because to sell the last unit the monopolist had to lower price on that unit AND lower price on all other units Monopolist gains Total revenue last unit s price but loses some revenue of all other units Myth monopolies are always profitable Monopolies don t necessarily always make profits if the demand for their good is low B Monopoly Profits These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Monopoly profits generally depend on monopoly price and average total cost ATC Consider two possibilities If the ATC curve is tangent to the demand schedule there will be no incentive for monopolist to exit Here they will have zero economic profits because under these circumstances total revenue total cost If ATC is under the demand schedule then the firm will be making positive economic profits and there will be strong incentives for new entrants to reap the high monopoly profits BUT There are barriers to entry for firms such as Legal Barriers Patents Trademarks Licenses Natural Barriers Economies of scale bigger firms have lower average costs than smaller firms
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