ECON1210 Tutorial 11

Monopoly
TA: Julie Lu
Email: julielu@connect.hku.hk

1
 Outline
1. Demand and Marginal Revenue
2. Supply
3. Markup and elasticity
4. Profit and surplus
5. Price ceiling on monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 2

 1. Demand and Marginal Revenue
Comparison of Competitive market and Monopoly

Perfect competition Monopoly

No control over price Seller has perfect control

over price

The firm faces a horizontal

demand The firm faces a regular
demand
MR=P
MR is double the slope of demand
e.g. D: P = 100 – Q, MR = 100 – 2Q
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 1. Demand and Marginal Revenue
Operate at MR=MC

Competitive market Monopoly

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 1. Demand and Marginal Revenue
Example 1:
There is only one canteen in Utopia. The demand function of meals in canteen in
Utopia is P = 100 - 4Q. The marginal cost of producing an additional unit of food is
$20 . How many units of meal should the canteen sell?

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 1. Demand and Marginal Revenue
Example 1:
There is only one canteen in Utopia. The demand function of meals in canteen in
Utopia is P = 100 - 4Q. The marginal cost of producing an additional unit of food is
$20 . How many units of meal should the canteen sell?

Answer:
MR = 100-8Q
MR = MC, we get Q=10

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 Outline
1. Demand and Marginal Revenue
2. Supply
3. Markup and elasticity
4. Profit and surplus
5. Price ceiling on monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 7

 2. Supply
There is no stable price and quantity relationship in monopoly market, monopolists do not have
a supply curve.

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 8

 2. Supply
Example 2.
Evaluate whether the following statements are True, False or Uncertain and give your explanations.
The marginal cost curve above average variable cost of a monopoly is its supply curve.

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 2. Supply
Example 2.
Evaluate whether the following statements are True, False or Uncertain and give your explanations.
The marginal cost curve above average variable cost of a monopoly is its supply curve.

Answer: False.
Optimal choice of output for the monopoly is based
on MR = MC.
The firm will then charge a price according to the
demand. The price is generally not the same as MC.
Since the price-quantity pair is not the same as
MC-quantity pair, MC cannot be the supply curve.

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 Outline
1. Demand and Marginal Revenue
2. Supply
3. Markup and elasticity
4. Profit and surplus
5. Price ceiling on monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 11

 3. Markup and elasticity
Markup: percentage of price above MC

A competitive firm cannot markup its goods:

Price of goods equal to marginal cost (P = MC) and each firm earns zero profit.

A firm with monopoly power can markup:

It charges a price greater than marginal cost (P > MC) and earns positive profit.

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 3. Markup and elasticity
Monopoly Markup: percentage of price above MC
( is the price elasticity of demand and is always smaller than 0)

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 3. Markup and elasticity
Monopoly Markup:

When-1 < < 0, 1+(1/ ) < 0, MC>0

hence P < 0 → Unreasonable
=> Production only occur at the price
elastic region of the demand curve.

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 14

 Outline
1. Demand and Marginal Revenue
2. Supply
3. Markup and elasticity
4. Profit and surplus
5. Price ceiling on monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 15

 4. Profit and surplus
Comparison of Competitive market and Monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 16

 4. Profit and surplus
Comparison of Competitive market and Monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 17

 4. Profit and surplus
Comparison of Competitive market and Monopoly

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 4. Profit and surplus
Example 3. The following diagram shows the market demand for widgets and the associated marginal
revenue curve.
When the industy is monopolized, the marginal cost curve is MCM. When the industy is competitive,
the industry's marginal cost curve is MCC. Suppose the industry is currently monopolized and you are a
judge with the power to break up the monopoly into several competing firms. In order to exercise that
power to improve economic efficiency, which four of the labelled areas would you want to measure?

(a) A, B, C and D
(b) I, J, E and H
(c) E, H, J and K
(d) C, D, F and G

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 4. Profit and surplus
Example 3.
We want to measure I, J, E and H
The total surplus under monopoly would be higher than the competitive solution when (I+J) > (E+H),
i.e. when the lower cost from producing the monopoly output outweighs the gains from trade under
competition.

Consumer Producer
surplus surplus
Monopoly A, B C, D, F, G, I, J

Competitive A, B, C, D, E F, G, H

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 Outline
1. Demand and Marginal Revenue
2. Supply
3. Markup and elasticity
4. Profit and surplus
5. Price ceiling on monopoly

ECON1210 Tutorial 11 (Chapter 11: Monopoly) 21

 5. Price ceiling on monopoly
Price ceiling and the deadweight loss

Impose a price ceiling New deadweight loss

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 5. Price ceiling on monopoly
Price ceiling and the deadweight loss

Useless policy Socially optimal output Lower production

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 Reminder
Quiz 11: Nov. 23, 10:30PM to Nov. 30, 10:30PM
Late Quiz 11: Nov. 30, 10:30PM to Dec. 2, 10:30PM

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 Acknowledgement
Materials of this tutorial are developed from the work of Dr. Ka-fu Wong and Mr. Zhao
Changming

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