Principles of economics openstax chapter9

College
Principles
ofPhysics
Economics
Chapter
Title
Chapter#9Chapter
Monopoly
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history

In the mid-nineteenth century, the United States, specifically the Southern states, had a near monopoly in the
cotton supplied to Great Britain. These states attempted to leverage this economic power into political power—
trying to sway Great Britain to formally recognize the Confederate States of America.


Characteristics of Monopoly

One seller of a good or service in the market
Legal monopolies are created because of legal rights (patents and copyrights)
Natural monopolies are created by the government since they operate with high fixed
costs (public utilities: gas, water, electricity)


Natural monopoly

In this market, the demand curve intersects the LRAC curve at its downward-sloping
part.
A natural monopoly occurs when the quantity demanded is less than the Minimum

Efficient Scale.
The government permits the monopoly to operate, but it would regulate it by setting
P=LRAC and requires profit to be invested in technological advancement for the firm to
be more efficient and lower AC producer.


Natural monopoly


Perfect Competition vs. monopoly

a)
b)

A perfectly competitive firm faces a horizontal demand at the market price. The
firm can sell as much as it produces at the same price.
A monopolistic firm faces the entire market demand. So, it has to choose a
combination of price and quantity that maximizes profits.


Perfect Competition vs. monopoly


Firm demand and marginal revenue

Because the firm faces the market demand curve, its MR lies beneath the demand curve and
intersects the horizontal axis at the middle of Q-intercept and zero.


Profit maximization

The profit maximizing price and quantity combination is where the distance between TR and TC is
largest.


Profit maximization

Profit maximization is also determined by the MR = MC rule. If MR > MC, the firm raises quantity. If
MC > MR, the firm cuts quantity. Optimal quantity is where MR = MC.


Price & quantity determination

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•
•
•
•

Set MR = MC to determine Q1.
Refer to the demand and vertical axis to determine P 1.
Q1 and P1 are profit maximizing quantity and price.
At Q1 determine AC = P2.
P1 > P2 for the firm making excess profit = P 2SR P1.


Price & quantity determination

At Q = 4
TR = 900*4 = 3,600

TC = 700*4 = 2,800
Total Profit: TR – TC = (900 – 700)*4 or 3,600 – 2,800 Total Profit = 800