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Monopoly and Imperfect Competition
Monopoly and Imperfect Competition
Monopoly and Imperfect Competition
1
Monopoly
A monopoly firm is the only seller of a good or service with
no close substitutes
Market in which the monopoly firm operates is called a monopoly
market
Key concept is notion of substitutability (input production)
Definition of monopoly firm or market may seem precise
But in real world, definition is not always so clear-cut
Because we all have different tastes and characteristics, we
can have different opinions about what is, and what is not, a
“close” substitute
As a result, we can have different ideas about how broadly or how
narrowly we should define a market when trying to decide if it is a
monopoly
Dollars
15 A
B
12
LRATC
5 C
DMarket
C
38
30
20 F
G
18
Demand
40 E
10,000 30,000
MR
Number of Subscribers
Lieberman & Hall; Introduction to Economics, 2005 15
Profit And Loss
A monopoly earns a profit whenever P > ATC
Its total profit at best output level equals area of a
rectangle
• Height equal to distance between P and ATC
• Width equal to level of output
A monopoly suffers a loss whenever P < ATC
Its total loss at best output level equals area of a
rectangle
• Height equal to distance between ATC and P
• Width equal to level of output
Total
Profit
D D
10,000 Number of 10,000 Number of
MR Subscribers MR Subscribers
E
$10 3. When monopoly $10 d
takes over, the old
market supply
curve . . .
D
Quantity of Quantity of
100,000 1,000
Output Output
1. In this competitive
market of 100 firms,
equilibrium price is $10
Lieberman & Hall; Introduction to Economics, 2005 21
Figure 5(c): Comparing Monopoly and
Perfect Competition
(c) Monopoly
Price
per
Unit S = MC
d1
30
MR1 3. ATC at 250 units is less
4. Kafka's monthly than price, so profit per
profit–$10,000–is unit is positive.
the area of the
shaded rectangle.
250 Homes Serviced per Month
A
60 C ATCads
50 ATCno ads