Managerial Economics

Presented by: Mark Ian Gerona

Presented to: Prof. Alan Jeffrey Santos

Chapter 9 Monopoly
Lesson Coverage

Monopoly Profit Maximization

Market Power

Market Failure due to Monopoly

Pricing
 History and Definition of Monopoly

Monopoly – firm’s Used in high In a nutshell,

ability to receive a profitable drugs, monopoly refers to
patent and be the when patent
protection expires, it
organizations to be
the sole supplier of
MANAGERIAL
sole producer of the
product for up to 20 allows generic brands goods that has no ECONOMICS
years. to enter the market close substitute.
 Monopoly in the Philippines

Some of the biggest monopolies in the Philippines

 Monopoly Profit Maximization
All firms, including competitive firms and monopolies, maximize their profits by
setting quantity such that marginal revenue equals marginal cost.

MARGINAL REVENUE CHOOSING PRICE OR QUANTITY 2 STEPS TO PROFIT MAZIMIZATION EFFECTS OF A SHIFT OF DEMAND CURVE
 Marginal Revenue
Is the change in its revenue from selling
one more unit.

Illustrated below is the marginal revenue difference of

competitive market firms to monopoly.

1 A monopolist’s marginal revenue is

always less than the price of its goods.

The demand curve in monopoly is

2
downward sloping.

When a monopoly drops the price to

3 sell one more unit, the revenue
received from the previous units sold
also decreases.
Marginal Revenue Curve

In monopoly's revenue is impacted by an

increase in sales in two ways.

Output Effect – more output sold, the higher

the Q
Price Effect – price falls, P is lower

MR Price Elasticity/Demand

The consumption of a product fluctuates in reaction to price changes, and this is measured by the price elasticity of
demand.

The responsiveness of the quantity desired or supplied of an item to a change in its price is measured by price
elasticity of demand. It is calculated by dividing the percentage change in price by the percentage change in quantity
demanded or provided.
Marginal Revenue Curve
Marginal Revenue Example
 If Ian charges $50 for a day pass, Ian can sell 40 passes per day —
for a total daily revenue of $2,000. Ian’s marginal revenue for the
first 40 passes is $50 per pass.

 If Ian reduces the price to $40, he can sell 80 passes per day —
for a total daily revenue of $3,200. The marginal revenue for the
40 additional passes sold is $1,200 (i.e., $3,200 minus $2,000), or
$30 per pass.

 If Ian reduces the price further to $30, he can sell 120 passes
each day — for a total daily revenue of $3,600. The marginal
revenue for the additional 40 passes sold is $400 (i.e., $3,600
minus $3,200), or just $10 per pass.

 Ian faces declining marginal revenue (i.e., each additional pass

sold brings in less additional revenue than the previous pass)
because when he reduces his price to sell more passes, he
reduces the price that every visitor to the park pays — even those
visitors who would have paid a higher price.
 Choosing Price or Quantity
In Monopoly
Any business operates where
its marginal income meets its
cost to maximize its profit.
negligible expense.
A monopoly can alter its
pricing more than a business
engaged in competition,
hence it has
a decision between pricing
and quantity settings to
maximize profit
The market demand curve
controls the other variable,
regardless of whether the
monopoly sets its quantity or
price.
The demand curve dips
downward, so the
A monopoly must decide
whether to accept a higher
price or a lesser quantity or
both.
If the monopoly sets its price,
the demand curve determines
how much output it sells. If the
monopoly picks an output
level, the demand curve
determines the price. Because
the monopoly wants to operate
at the price and output at
which its profit is maximized, it
chooses the same profit-
maximizing solution whether it
sets the price or quantity
 2 Steps of Profit Maximization
Profit Maximizing Output

A monopolist can
determine its profit-
maximizing price and
quantity by analyzing the
marginal revenue and
marginal costs of
producing an extra unit. If
the marginal revenue
exceeds the marginal cost,
then the firm should
produce the extra unit.

Shut Down Decision

A monopoly shuts down to avoid making a loss in the short run if its price is below its average variable cost at
its profit-maximizing (or loss-minimizing) quantity. In the long run, the monopoly shuts down if the price is less
than its average cost.
Effects of a shift demand curve
Shifts in the demand curve or
the marginal cost curve have an
impact on the profit-maximizing
strategy.
Monopoly price and quantity
and can have a broader range of
consequences than a
competitive market. The impact
of a shift in a competitive
market
A competitive firm’s marginal
cost curve tells us everything we
need to know about the amount
that the firm is willing to supply
at any given market price.
The competitive firm’s supply
curve is its upward-sloping
marginal cost curve above its
minimum average variable cost.
Market
Power

Market Power & the shape
of the demand curve
If the monopoly faces a highly elastic—
nearly flat—demand curve at the profit
maximizing quantity, it would lose
substantial sales if it raised its price by
even a small amount.
Conversely, if the demand curve is not
very elastic (if it is relatively steep) at
that quantity, the monopoly would lose
fewer sales from raising its price
by the same amount.
The Lerner Index
Another way to show how the elasticity of
demand affects a monopoly’s price relative to
its marginal cost is to look at the firm’s Lerner
Index (or price markup)—the ratio of the
difference between price and marginal cost to
the price: (p - MC)>p.
This index can be calculated for any firm,
regardless of whether the firm is a monopoly.
The Lerner Index is zero for a competitive firm
because a competitive firm produces where
marginal cost equals price.
The Lerner Index measures a firm’s market
power: The larger the difference between
price and marginal cost, the larger the Lerner
Index and the firm’s market power. If the firm
is maximizing its profit, we can express the
Lerner Index in terms of the elasticity of
demand by rearranging Equation
Sources of the
market power
What factors cause a monopoly to face a
relatively elastic demand curve and hence
have little market power? Ultimately, the
elasticity of demand of the market demand
curve depends on consumers’ tastes and
options. The more consumers want a
good—the more willing they are to pay
“virtually anything” for it—the less elastic
is the demand curve.
Other things equal, the demand curve a firm
(not necessarily a monopoly) faces
becomes more elastic as (1) better substitutes
for the firm’s product are introduced,
(2) more firms enter the market selling the
same product, or (3) firms that provide the
same service locate closer to this firm. The
demand curves for Xerox, the U.S. Postal
Service, and McDonald’s have become more
elastic in recent decades for these three
reasons.
Market Power
Failure due to
Monopoly Pricing
 Market Failure
A monopolist can raise the price of a product without worrying about the actions of competitors.
In a perfectly competitive market, if a firm raises the price of its products, it will usually lose
market share as buyers move to other sellers.

Monopolized oil Energy Producing Price increase to local Increase of poverty

resulting to companies relying transportation/logistics in the country/area
price hike. on oil will increase of goods resulting to involved
its prices increase price of goods