• GROUP 6 MEMBERS

• LYCA JANE PAUNILLAN

• APRIL JOY NOSAL PERDANIO
• JUNAVEE FERNANDEZ SEDILLO
• MARIEL CARILLO PATINGA
CHAPTER 10: MONOPOLY: DECISION-MAKING
WITHOUT RIVALS
 
IN THIS CHAPTER

▶ IDENTIFYING THE SOURCE OF MONOPOLY POWER

▶ SEPARATING DEMAND AND MARGINAL REVENUE
▶ DETERMINING THE PROFIT-MAXIMIZING
QUANTITY AND PRICE
▶ MINIMIZING COST WITH MULTIPLE FACTORIES
 
 
• IN THIS CHAPTER, I START BY EXAMINING MONOPOLY
CHARACTERISTICS AND THEIR IMPACT ON DECISION-MAKING,
ESPECIALLY PRICE SETTING. THESE CHARACTERISTICS GIVE THE
MONOPOLIST THE ABILITY TO SET PRICE. AFTER IDENTIFYING THE
SOURCE OF MONOPOLY POWER, I SUMMARIZE HOW A MONOPOLIST
DETERMINES THE SHORT-
• RUN PROFIT-MAXIMIZING QUANTITY, PRICE, AND AMOUNT OF
PROFIT BY USING TWO APPROACHES — THE FIRST BASED ON TOTAL
REVENUE AND TOTAL COST, AND THE SECOND BASED ON
MARGINAL REVENUE AND MARGINAL COST. AFTER CONSIDERING
THE SHORT- RUN SITUATION, I EXPLAIN HOW THINGS EVOLVE IN
THE LONG RUN. FINALLY, I CONCLUDE
• STANDING ALONE: IDENTIFYING THE SOURCES OF MONOPOLY
POWER: IF YOU POSSESS MONOPOLY POWER, YOU’RE ABLE TO SET
YOUR GOOD’S PRICE. THUS, AS MANAGER, YOU MUST NOW
DETERMINE BOTH THE PROFIT-MAXIMIZING QUANTITY OF OUTPUT
AND THE GOOD’S PRICE. YOU REALLY HAVE TO MIND YOUR P’S AND
Q’S IN MONOPOLY. MONOPOLIES HAVE THE FOLLOWING
CHARACTERISTICS:
• ✓ A SINGLE FIRM: YOUR FIRM IS THE ONLY ONE THAT PRODUCES THE GOOD. , THE
ENTIRE QUANTITY OF THE GOOD SOLD IN THE MARKET IS PRODUCED BY YOUR FIRM.
 
• ✓ NO CLOSE SUBSTITUTES: IN ADDITION TO BEING THE ONLY FIRM PRODUCING THE
GOOD, THERE ARE NO CLOSE SUBSTITUTES FOR THE GOOD YOU PRODUCE. NO OTHER
FIRM PROVIDES A SIMILAR OR DIRECTLY SUBSTITUTABLE GOOD. AS A CONSEQUENCE,
NO DIRECT COMPETITION BETWEEN FIRMS EXISTS.
 
• ✓ BARRIERS TO ENTRY: BARRIERS TO ENTRY ENSURE THE CONTINUED EXISTENCE OF
THE MONOPOLY. BARRIERS TO ENTRY ALSO ENABLE THE MONOPOLIST TO MAINTAIN
POSITIVE ECONOMIC PROFIT, OR RETURNS IN EXCESS OF THE NORMAL RATE OF
RETURN, IN THE LONG RUN. BARRIERS TO ENTRY CAN TAKE MANY FORMS, INCLUDING
• ECONOMIES OF SCALE, GOVERNMENT REGULATION, PATENTS, AND CONTROL OF
SPECIFIC NATURAL RESOURCES.
• UNABLE TO CHARGE AS MUCH AS YOU WANT: RELATING DEMAND,
PRICE, AND REVENUE
 
• THERE IS LITTLE DOUBT THAT MONOPOLY HAS A BAD REPUTATION. AT THE WORD
MONOPOLY, CONSUMERS TYPICALLY PICTURE A LARGE FIRM THAT CHARGES ANY PRICE
IT WANTS. IT’S A FIRM WITH VIRTUALLY UNLIMITED POWER. BUT CONSUMERS ARE
WRONG! THE ULTIMATE SOURCE OF POWER IN A MARKET IS THE CONSUMER. AS A
CONSUMER, YOU GET TO DECIDE WHETHER YOU’RE WILLING AND ABLE TO PURCHASE A
GOOD AT A GIVEN PRICE.
• IN THEORY, THE MONOPOLIST CAN CHARGE ANY PRICE IT WANTS, BUT PRACTICALLY,
THE MONOPOLIST CAN’T CHARGE TOO HIGH OF A PRICE OR YOU WON’T BUY THE
GOOD. THE MONOPOLIST IS CONSTRAINED BY YOUR WILLINGNESS TO PAY THE PRICE IT
CHARGES.
•ENGAGING IN ADVERTISING AND NON-PRICE
COMPETITION
• MONOPOLISTS DON’T HAVE DIRECT RIVALS. HOWEVER, MONOPOLISTS STILL HAVE
INCENTIVE TO ENGAGE IN ADVERTISING AND OTHER FORMS OF NON–PRICE
DISCRIMINATION, SUCH AS INNOVATION.
 
•MAXIMIZING SHORT-RUN PROFIT
 
• LIKE EVERY OTHER FIRM, REGARDLESS OF HOW MUCH COMPETITION EXISTS IN THE
MARKET, THE MONOPOLIST WANTS TO MAXIMIZE PROFIT — THE DIFFERENCE
BETWEEN ITS TOTAL REVENUE AND TOTAL COST. BASIC COST THEORY, AS I DESCRIBE IN
CHAPTER 8, ISN’T AFFECTED BY THE AMOUNT OF COMPETITION THAT EXISTS.
 
• MAXIMIZING PROFIT WITH TOTAL REVENUE AND
TOTAL COST

• TOTAL PROFIT EQUALS TOTAL REVENUE MINUS TOTAL COST. IN ORDER TO

MAXIMIZE TOTAL PROFIT, YOU MUST MAXIMIZE THE DIFFERENCE BETWEEN
TOTAL REVENUE AND TOTAL COST.
• THE FIRST THING TO DO IS DETERMINE THE PROFIT-MAXIMIZING QUANTITY.
SUBSTITUTING THIS QUANTITY INTO THE DEMAND EQUATION ENABLES YOU
TO DETERMINE THE GOOD’S PRICE. ALTERNATIVELY, DIVIDING TOTAL
REVENUE BY QUANTITY ENABLES YOU TO DETERMINE PRICE.
• THE TOTAL REVENUE CURVE INCREASES BUT AT A DECREASING
RATE — THE CURVE BECOMES FLATTER. EVENTUALLY, TOTAL
REVENUE BEGINS TO DECREASE.
• THIS RELATIONSHIP BETWEEN TOTAL REVENUE AND QUANTITY
REFLECTS THE FACT THAT AS A MONOPOLIST, YOU NEED TO
CHARGE A LOWER PRICE IN ORDER TO SELL MORE OUTPUT.
• THE NONLINEAR RELATIONSHIP, OR INCREASING AT A
DECREASING RATE, ALSO REFLECTS THE CHANGING PRICE
ELASTICITY OF DEMAND ALONG THE DEMAND CURVE
• THIS IS THE REGION WHERE MARGINAL REVENUE IS GREATER THAN ZERO, AND
THUS TOTAL REVENUE IS INCREASING. DECREASING TOTAL REVENUE AS
OUTPUT INCREASES REFLECTS THE INELASTIC REGION OF MARKET
• DEMAND WHERE MARGINAL REVENUE IS NEGATIVE.
•  MAXIMIZING PROFIT WITH A MARGINALLY BETTER
METHOD
 
• QUITE OFTEN IT’S EASIER TO DETERMINE THE PROFIT-MAXIMIZING QUANTITY OF
OUTPUT BY FOCUSING ON THE LAST UNIT YOU PRODUCE, OR THE MARGINAL
UNIT. IN ORDER TO ADD TO YOUR PROFIT, AN ADDITIONAL OR MARGINAL UNIT
OF THE GOOD MUST ADD MORE TO YOUR REVENUE THAN IT ADDS TO YOUR COST.
IN OTHER WORDS, MARGINAL REVENUE IS GREATER THAN MARGINAL COST.
• AT THE OUTPUT LEVEL THAT MAXIMIZES PROFIT, AN ADDITIONAL UNIT OF
OUTPUT DOESN’T ADD ANY MORE TO YOUR TOTAL PROFIT. THIS OCCURS WHEN
MARGINAL REVENUE EQUALS MARGINAL COST
• TO MAXIMIZE PROFITS, YOU PRODUCE THE OUTPUT LEVEL ASSOCIATED WITH
MARGINAL REVENUE EQUALS MARGINAL COST, THAT CORRESPONDS TO THE
POINT WHERE THE MARGINAL REVENUE AND MARGINAL COST CURVES
INTERSECT.
• MARGINAL REVENUE EQUALS MARGINAL COST MAXIMIZES TOTAL PROFIT
 CALCULATING ECONOMIC PROFIT AND THE
PROFIT-PER UNIT FALLACY
•  ECONOMIC PROFIT PER UNIT EQUALS PRICE MINUS AVERAGE TOTAL COST OR
• IN
  FIGURE 10-3, ECONOMIC PROFIT PER UNIT IS ILLUSTRATED BY THE DOUBLE-
HEADED ARROW LABELED
• TOTAL PROFIT EQUALS PROFIT PER UNIT MULTIPLIED BY THE NUMBER OF
UNITS SOLD, OR
In figure 10-4, the monopolistic demand and the marginal revenue curves have the same shape. The
demand curve is downward sloping, indicating that the monopolist must lower price to sell a greater
quantity of output, and marginal revenue lies below the demand curve. Average total cost, average
total variable, and marginal cost all have the usual shapes. Marginal cost is upward sloping.
Reflecting diminishing returns. Average variable cost and average total cost are both U-shaped, and
marginal cost passes through the minimum point on both curves.
SHUTTING DOWN – PRODUCING ZERO OUTPUT
-EARNING ZERO REVENUE -INCUR ZERO
VARIABLE COST
-STILL LOSE MONEY BECAUSE OF THE
FIXED COST
-IF THE PROFIT MAXIMIZING PRICE IS LESS
THAN AVERAGE VARIABLE COST

SHORT RUN - LOSSES EQUAL TOTAL FIXED COST

ANTICIPATING THE LONG RUN
• THE LONG RUN ALLOWS YOU TO CHANGE ANY INPUT
• FIXED INPUTS DON’T EXIST IN THE LONG RUN
• ALLOWS OTHER FIRMS TO ENTER PROFITABLE MARKETS
BUT DOES NOT HAPPEN IN MONOPOLISTIC MARKETS DUE
TO BARRIERS OF ENTRY
 KEEP OTHERS OUT WITH BARRIERS TO
ENTRY

• - A CRITICAL CHARACTERISTIC OF MONOPOLY IS THE PRESENCE OF

BARRIERS TO ENTRY.

• - BARRIERS TO ENTRY IS AN ECONOMICS AND BUSINESS TERM

DESCRIBING FACTORS THAT CAN PREVENT OR IMPEDE
NEWCOMERS INTO A MARKET OR INDUSTRY.
 NATURAL MONOPOLY

• - NATURAL MONOPOLIES EXIST DUE TO ECONOMIES OF SCALE.

• - THE MONOPOLY PROVIDE THE COMMODITY AT MUCH LOWER COST PER UNIT
THAN POTENTIAL ENTRANTS.
 NATURAL MONOPOLY

• EXAMPLES:

• UTILITY INDUSTRY

• ELECTRIC COMPANIES
 LEGAL MONOPOLY

-LEGAL MONOPOLIES EXIST DUE TO GOVERNMENT LEGISLATION AND PROTECTION.

- LEGAL MONOPOLIES ARE PRIVATELY-OWNED COMPANIES THAT ARE GRANTED A

MONOPOLY BY THE GOVERNMENT.

- IT IS ALSO ESTABLISHED TO PROTECT CONSUMER'S INTEREST.

• EXAMPLE:
• LOCAL CABLE TELEVISION SERVICE.
 GOVERNMENT MONOPOLY

• - IT IS A MONOPOLY THAT'S OWNED AND OPERATED BY GOVERNMENT

EXAMPLE:
•GARBAGE COLLECTION
• PUBLIC WATER COMPANIES
 PATENT MONOPOLY

• - PATENTS ARE LEGAL INSTRUMENTS INTENDED TO

ENCOURAGE INNOVATION BY PROVIDING A LIMITED
MONOPOLY TO THE INVENTOR IN RETURN FOR THE
DISCLOSURE OF THE INVENTION
 ENJOYING THE LONG RUN

• - BECAUSE OF BARRIERS TO ENTRY, MONOPOLIES ARE

ABLE TO MAINTAIN POSITIVE ECONOMIC PROFIT IN THE
LONG RUN.

• - IN ORDER TO STAY IN BUSINESS IN THE LONG RUN, THE

MONOPOLY MUST EARN AT LEAST ZERO ECONOMIC
PROFIT
 POLAROID AND BANKRUPTCY
• IF YOU HAVE SUBSTANTIAL PROFITS IN THE LONG RUN, OTHER FIRMS
TRY TO OFFER SIMILAR SUBSTITUTES IN ORDER TO RECEIVE SOME OF
THOSE PROFITS.

• - POLAROID HAD A PATENT MONOPOLY ON INSTANT-DEVELOPING

FILM. INTRODUCED IN 1948, INSTANT-DEVELOPING FILM AND THE
CAMERA IT REQUIRED WERE POLAROID’S FLAGSHIP PRODUCTS FOR
OVER HALF A CENTURY.

• - BECAUSE OF THE GREAT PROFITS POLAROID RECEIVED, HOWEVER,

OTHER COMPANIES STARTED DEVELOPING SUBSTITUTES.
 PRODUCING WITH MULTIPLE FACILITIES

• - IN ORDER TO MAXIMIZE PROFITS, THE MONOPOLIST

MUST DETERMINE HOW TO ALLOCATE PRODUCTION
AMONG THESE FACTORIES.

• - IN DETERMINING THIS ALLOCATION, THE MONOPOLIST’S

GOAL IS TO PRODUCE ADDITIONAL UNITS AT THE LOWEST
COST.
 GETTING EACH FACILITY’S BEST
• - IF THE MARGINAL COST OF PRODUCING AN ADDITIONAL UNIT OF
OUTPUT IN ONE FACTORY IS HIGHER THAN THE MARGINAL COST
OF PRODUCING THE ADDITIONAL UNIT OF OUTPUT IN A SECOND
FACTORY.
• - THE TOTAL COSTS ARE LOWER IF YOU SWITCH PRODUCTION
FROM THE FACTORY WITH THE HIGHER MARGINAL COST TO THE
FACTORY WITH THE LOWER MARGINAL COST.
• -COST MINIMIZATION REQUIRES THAT THE MARGINAL COST OF
THE LAST UNIT PRODUCED IN EACH FACTORY IS EQUAL FOR ALL
FACTORIES.
THE MARGINAL COST CURVE IN THE FAR RIGHT DIAGRAM
LABELED ΣMC IS THE HORIZONTAL SUMMATION OF THE
MARGINAL COST CURVES FOR EACH FACTORY.