CHAPTER 9: MONOPOLY

SUBMITTED BY GROUP 1:
BERIŃA, JINDEL
REBOLOSAN, MARIA MISSY
SUAN, JINKY MAE
TORRALBA, GRACELLA

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MONOPOLY
࣢ The Word Monopoly is a Latin Term. “Mono”
means Single and “Poly” means Seller.
࣢Monopoly is a form of Market Organization in
which there is only One Seller of the Commodity.
࣢There are No Close Substitutes for the Commodity
sold by the Seller.
࣢Refers to the form of market organization in which
there is a single seller of a product without close
substitute.
࣢Characterized by an absence of competition, which
often results in high prices and inferior products.

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WHY MONOPOLIES ARISE?
1. it is the sole seller of its product.
2. its product does not have close substitutes.
While a competitive firm is a price taker, a monopoly firm is a price maker.
The fundamental cause of monopoly is Barriers to entry.
Barriers to entry have three sources:
 Ownership of a key resource.
 The government gives a single firm the exclusive right to produce some good.
(Patents, Copyrights and Government Licensing)
 Costs of production make a single producer more efficient than a large number of
producers. (Natural Monopolies)

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 EXISTENCE OF MONOPOLY

࣢ True monopolies generally exist MONOPOLY IN THE PHILIPPINES

in government controlled markets. ࣢Meralco Electric Company
EXAMPLE: Indian Railway ࣢SM (SM Corp.)
࣢Monopoly in private business is
࣢Grab
rare.
࣢Private firms who have ࣢MAYNILAD WATER
considerable market share. ࣢Ayala
Like :Google
Microsoft
Apple

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PURE MONOPOLY
࣢Exists when a single firm is the sole producer of a product or
services for which there are no close substitutes.

The difference between a monopoly and a pure monopoly is

that a monopoly may exist in a market with several suppliers, while for
a pure monopoly, there is strictly one market supplier. A pure monopoly
has various characteristics, such as sole supplier, no substitute
products, and no rival/competitors.

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FEATURES OF MONOPOLY
1. One seller & large number of buyers
2. Monopoly is also an industry
3. Restrictions on the entry of new firms
4. No close substitutes
5. Price maker

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CAUSES AND SOURCES OF MONOPOLY
POWER
Control over Raw Materials or Ownership of Natural Resources.
Patents.
Technical Barriers.
Government Policy.
Historical and Entry Lag.
 Limit-Pricing Policy or Unfair Competition.
Capital Size.
Business Mergers.

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TYPE OF BARRIERS TO ENTRY
Institutional barriers to entry. Strategic barriers to entry.
Exclusive franchising Limit pricing
Licenses Excess capacity
Patent protection Product differentiation (brand
Technical barriers to entry. proliferation)
Unique resources
Economies of scale and scope
Economy of experiences

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DEMAND AND REVENUE UNDER MONOPOLY
 In a monopoly situation, there is no difference between firm & industry.
 Under monopoly situation, firm’s demand curve also constitutes industry’s demand
curve.
 Demand curve of the monopolist is also average revenue curve.
 It slopes downward. It means if the monopolist fixes high price, the demand will shrink
or decrease. On the contrary, if he fixes low price, the demand will expand or increase.
 Under monopoly, average revenue and marginal revenue curves are separate from one
another. Both slope downwards.
 Fig.1 will show average revenue (demand) curve & marginal revenue curve. Both are
sloping downward. Marginal revenue curve is below average revenue or demand curve

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A Demand curve of the
monopolist is also average
revenue (ARC) curve. It slopes
downward. It means if the
monopolist fixes high price, the
demand will shrink.

Demand rises with fall in price(AR)

At point „N‟ , total revenue will be maximum.( i.e. ,TR = P x Q)
Average revenue is never zero, but marginal revenue may be
zero or even negative
At OP price, the monopolist will produce OQ quantity of
output, because this price affords him maximum total
revenue

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PRICE DETERMINATION UNDER SHORT
RUN
A Monopolist in Equilibrium may face any of Three Situations in the
Short period .
1. Super Normal Profit

2. Normal Profit

3. Minimum Loss

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 SUPER NORMAL PROFIT
• In This Figure ,The Monopolist is in
equilibrium at point E .
• Because at this point MC=MR .
• The Monopolist Produces OM
Units & sell it at AM price
• Thus in this Situation the super
normal profit of the monopolist
will be ABCD.

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 NORMAL PROFIT
• In This Figure ,The Firm is in equilibrium at
point E .
• Where MC=MR & OM is the equilibrium
output .
• At this output AC Curve Touches Average
Revenue(AM) curve at point A.
• At point ‘A’ price OP (AM) is equal to the
average Cost of the product .
• Therefore firms earn only normal profit in
equilibrium situation as at equilibrium
output its AC=AR
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 MINIMUM LOSS
• In this Figure , The monopolist is in equilibrium
at point E , Where MC=MR & produces OM
output.
• The price of equilibrium output OM is fixed at
OP1 (AM).
• At this Price The Average Variable Cost(AVC)
Curve Touches AR curve at point ‘A’.
• At this situation the firm will get only AVC from
the Prevailing Price.
• The firm will bear the loss of fixed cost , AN per
The firm will bear total loss
equivalent to NAP1P as shown
Unit
by the shaded area.
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 PRICE DETERMINATION
• InUNDER
the Figure ,Point LONG
E Indicates the RUN
equilibrium of
the monopolist .
• At Point E, MR = LMC . Hence OM is the
equilibrium Output & ON (=AM) is the
equilibrium Price. BM is the long run average
cost.
• Price (Average Revenue ) AM is being more than
long run average cost (AR > LAC), the Monopolist
earn (AM –BM =AB) Super Normal Profit Per Unit.
• The Firm’s Super Normal Profit will be ABPN as
Shown by Shaded Area
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REVENUES AND COSTS FOR
MONOPOLISTS
Quantity (Q) Price (P) Total Revenue (TR) Total Cost (TC)
0 $1,300 $0 $300
1 $1,200 $1,200 $500
2 $1,100 $2,200 $725
3 $1,000 $3,000 $1,000
4 $900 $3,600 $1,250
5 $800 $4,000 $1,650
6 $700 $4,200 $2,500
7 $600 $4,200 $4,000
8 $500 $4,000 $6,400

Table 8.1: Revenue and Cost Schedule for a Monopolist

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 Figure 8.3: A Revenue and Cost Curve for a Monopolist

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MARGINAL REVENUE AND
MARGINAL COST FOR A MONOPOLIST
Quantity Price Total Marginal Total Cost Marginal
(Q) (P) Revenue (TR) Revenue (MR) (TC) Cost (MC)
0 $1,300 $0 XX $300 XX
1 $1,200 $1,200 $1,200 $500 $200
2 $1,100 $2,200 $1,000 $725 $225
3 $1,000 $3,000 $800 $1,000 $275
4 $900 $3,600 $600 $1,250 $250
5 $800 $4,000 $400 $1,650 $400
6 $700 $4,200 $200 $2,500 $850
7 $600 $4,200 $0 $4,000 $1,500
8 $500 $4,000 -$200 $6,400 $2,400

Table 8.2: Marginal Revenue and Marginal Cost for a Monopolist

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 Figure 8.4: The Marginal Revenue and Marginal Cost of a Monopolist

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MONOPOLIES AND PROFITS
Table 8.3: Marginal and Average Revenues and Costs

Marginal Revenue Marginal Cost Average Total Cost

Quantity (Q) Price (P)
(MR) (MC) (ATC)

0 $1,300 XX XX XX
1 $1,200 $1,200 $200 $250
2 $1,100 $1,000 $275 $362.50
3 $1,000 $800 $250 $333.33
4 $900 $600 $225 $312.50
5 $800 $400 $400 $330
6 $700 $200 $850 $416.67
7 $600 $0 $1,500 $571.43
8 $500 -$200 $2,400 $800

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 Figure 8.5: The Profit Earned by a Monopolist

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 THE STEPS TO DETERMINE A
MONOPOLIST’S PROFIT
Step 1: The Monopolist
Determines Its Profit-
Maximizing Level of Output
Step 2: The Monopolist Decides
What Price to Charge
Step 3: Calculate Total Revenue,
Total Cost, and Profit

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PRICE DISCRIMINATION OR
DISCRIMINATING MONOPOLY
Definitions:
In the words of Koutsoylannis, “Price discrimination exists when
the same product is sold at different prices to different buyers.”
-Dooley, “Discriminatory monopoly means charging different rates
from different customers for the same good or service.”

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PRICE DISCRIMINATION OR
DISCRIMINATING MONOPOLY
 In many cases, firms sell the same good to different
customers for different prices, even though the costs of
producing for the two customers are the same. This practice
is called price discrimination.
 Price discrimination is a selling strategy that charges
customers different prices for the same product or service
based on what the seller thinks they can get the customer to
agree to. In pure price discrimination, the seller charges
each customer the maximum price he or she will pay.

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EXAMPLES OF PRICE DISCRIMINATION
1. Movie Tickets – Many movie theaters charge a lower price for
children and senior citizens than for other patrons.
2. Airline Prices – seats on airplanes are sold at many different prices.
3. Discount Coupons – A discount coupon is basically a code that a
customer can enter at check out and get a discount on their order.
4. Financial Aid
5. Quantity Discounts – charging different prices to the same customer
for different units that the customer buys.

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 THAT IN ALL
THINGS, GOD
MAY BE
GLORIFIED.
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