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By: Muhammad Shahid Iqbal
By: Muhammad Shahid Iqbal
An industry is a natural
monopoly when a single firm
can supply a good or service
to an entire market at a
smaller cost than could two or
more firms.
A natural monopoly arises
when there are economies of
scale over the relevant range
of output.
HOW MONOPOLIES MAKE PRODUCTION
AND PRICING DECISIONS
Monopoly versus Competition
Monopoly
Is the sole producer
Is a price maker
Competitive Firm
Is one of many producers
Is a price taker
Price Price
Demand
Demand
∆TR/ ∆Q = MR
MR = a - 2bQ
A monopolist’s MR is always less than the price of its good.
Marginal Demand
cost
Marginal revenue
0 Q QMAX Q Quantity
Copyright © 2004 South-Western
Profit Maximization
Marginal cost
E B
Average
total D C
cost
Demand
Marginal revenue
Algebra of Profit Maximization: A Numerical
Illustration
What’s the MR if a firm faces a linear demand curve for its
product?
P(Q) = a + bQ
MR = a + 2bQ
Given estimates of
P = 10 - Q
C(Q) = 6 + 2Q
Optimal output?
MR = 10 - 2Q
MC = 2
10 - 2Q = 2
Q = 4 units
Optimal price?
P = 10 - (4) = $6
Maximum profits?
PQ - C(Q) = (6)(4) - (6 + 8) = $10
Marginal
revenue Demand
The Deadweight Loss
Price
Consumer
surplus
Monopoly Deadweight
price loss
Profit
Marginal cost
Marginal Demand
revenue
Price
Profit
Marginal cost
Demand