DIPLOMA IN MANAGEMENT STUDIES

ECO2101 MICROECONOMICS

SESSION 9
SESSION 9: MONOPOLY
At the end of the session, students should be able to:

1. Explain how a monopoly arises and distinguish between

a single-price monopolist and a price-discriminating
monopolist

2. Explain how a single-price monopoly determines its

output and price

3. Compare the performance and efficiency of a single-

price monopoly with a perfect competitive market structure

4. Explain how price discrimination increases profit

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What is a Monopoly Market
Structure?
A monopoly market structure is the
opposite of perfect competition, where
there is no competition at all.

There are two types of monopolies:

Price
Single price
discrimination
monopoly
monopoly
Characteristics of Monopoly
• Monopoly is a market structure where a
single firm exercises exclusive control over
the supply of a particular product or service,
while facing little or no competition.
• Consumers have limited or no choices when
it comes to finding a similar product in the
market.
• A monopoly arises due to high barriers to
entry.
• Not all monopolies are inherently negative.
Barriers to Entry
Barriers to entry refers to the obstacles or challenges that prevent or deter
potential competitors and new firms from entering the market and
challenging the dominant firm.

Economies Economies Brand

of scale of scope loyalty

Legal and Intellectual

High initial
regulatory property
investment
barriers rights

Control of
Network
essential
effects
resources
Demand Curve and Marginal Revenue Curve
– a single price monopolist

• The key characteristic of a monopoly is that it has

exclusive control over the supply of a particular
product in a market, giving it significant market
power.
• A monopoly has the ability to set prices to a certain
extent, but it is not entirely unrestricted as it is still
subjected to law of demand and price elasticity.
If the demand is highly elastic If the demand is relatively inelastic

• Consumers are sensitive to price • Consumers are less sensitive to

changes. price changes.
• The monopoly will have to be • The monopoly can exert more
cautious about raising prices too control over prices
high
Demand Curve and Marginal Revenue Curve –
a single price monopolist
• Demand curve:
• Downward sloping – the quantity
demanded increases as the price
of the product decreases.
• Consumers are more willing to
purchase more units of output at
lower prices.
• P=a-bQ

• MR curve:
• Lies below demand curve.
• A monopoly must reduce the price
for each additional unit sold to
increase sales → lower MR.
• MR=a-2bQ
Demand Curve and Marginal Revenue
Curve – a single price monopolist
• The lower the price, the
higher the quantity
demanded.
• When the monopolist lowers
the price to sell more units, it
generates additional revenue
from the increased quantity
→ MR decreases with each
additional unit sold.

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 Marginal Revenue and Elasticity
• % ∆Qd = % ∆P
• % ∆Qd > % ∆P • the MR=0 because the revenue
• the MR will be positive gained from selling the additional unit
because the revenue = the revenue lost from lowering the
gained from selling the price for all units
additional unit • To maximise TR, the firm should set
outweighs the revenue the price at the point where demand
lost from lowering the is unitary elastic
price for all units
• the firm can increase
TR by lowering the
price

• % ∆Qd < % ∆P
• the MR will be negative because the revenue
gained from selling the additional unit is
smaller than the revenue lost from lowering the
price for all units
• the firm can increase TR by raising the price

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 Total Revenue Curve
1. The total revenue curve is an
"n-shaped curve“.

2. Its increasing portion

corresponds to the elastic
portion of the demand curve.

3. It reaches its maximum point

at the unit elastic demand
and then has a decreasing
portion corresponds to the
inelastic portion of the
demand curve.
 Price and Output Under Monopoly
1. The objective of a
monopolist is to maximize MC=MR!!!
profit.
2. the monopolist will have to MC
determine the optimal output
using the marginal analysis.
3. An additional unit of output P
will bring the additional
revenue (marginal revenue) MR
to the monopolist but it also
incurs additional cost
(marginal cost) to the
monopolist since more Q
resources are needed.
 Price and Output Under Monopoly

Output Price TC MC TR MR Profit

0 10 10 - 0 - -10 • Optimal output
1 9 17 7 9 9 -8 condition →
2 8 20 3 17 8 -3 MC=MR.
3 7 24 4 24 7 0
4 6 26 2 27 3 1
5 5 27 1 28 1 1
6 4 34 7 26 -2 -8
7 3 43 9 21 -5 -22
8 2 54 11 16 -5 -38
9 1 67 13 9 -7 -58
 Price and Output Under Monopoly
1. A monopolist may make a 2. If a monopolist P=ATC, the
profit if the P>ATC. monopolist will be making a
normal profit.

P MC

ATC

P1=ATC1

Q
Q1 MR D
Price and Output Under Monopoly

3. If a monopolist P<ATC, the monopolist

will be making a loss.
Price and Output Under Monopoly
P>AVC

AVC1

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Price and Output Under Monopoly

P=AVC

AVC1=

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Price and Output Under Monopoly

P<AVC
P
MC ATC
ATC1
AVC
AVC1
P1

MR D
Q
Q1

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Price and Output Under Monopoly

In the short run

P>ATC→economic P=ATC→normal P<ATC→economic

profit profit loss

Continue
operation? Shut
down?

P>AVC→continue P=AVC→continue P<AVC→shut

operation operation down!!!

• In the long run, a loss incurring monopolist

will leave the industry.
 Total Revenue and Total Cost of a
Single Price Monopolist
[Link] range of output
where profit occurs is
between Q1 and Q2,
and the optimal output
is Q* where the
vertical distance
between TR and TC
is the largest.

[Link] the output, the

slope of TR and TC is
the same. which fulfils
the condition of MR =
MC.
 Comparing Market
Structure & Efficiency of
a Monopolist with
Perfect Competition
 Market Structure and Efficiency

Productive Allocative
efficiency efficiency
 Monopoly and Inefficiency
P
In perfect competition:
Productive efficiency
Allocative efficiency
MC
Price is lower
Output is greater
Pmonopoly ATC

ATCmonopoly
Pperfect=ATCperfect MRperfect=ARperfect=Dperfect

Dmonopoly
MRmonopoly
In monopoly:
Q
Productive inefficiency Qmonopoly Qperfect

Allocative inefficiency
Price is higher
Output is fewer
 Monopoly and Social Welfare

• Social welfare is achieved when both consumer

surplus and producer surplus are maximised.
• In monopoly, the quantity produced is determined
when MC=MR, rather than at the intersection of the
demand and supply curves.
 Monopoly and Social Welfare
Deadweight loss:
• The loss of economic welfare
that occurs when resources are
not allocated optimally.
• Due to disparity between
Smaller producer and consumer
consumer surplus.
surplus
Loss of welfare:
• The higher price and reduced
output compared to perfect
competition leads to some
Greater potential consumers being
producer priced out of the market,
surplus
resulting in a loss of overall
welfare.
• The value that potential
consumers place on the product
is higher than the marginal cost
of production, but they are
unable or unwilling to purchase
it at the monopolist's higher
price (P > P1).
Monopoly and Inefficiency –
Advantages?
• Natural monopoly.
– A single firm can achieve
economies of scale and operate
more efficiently compared to
multiple smaller firms in the
market.
– Lower ATC → lower prices for
consumers.
– The potential for long-term profits
in a monopoly may incentivize the
monopolist to invest in research
and development efforts, leading
to the introduction of innovative
products or services that benefit
society as a whole.

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 Comparing between
Perfect Competition and Monopoly
Price Discrimination
Monopoly
RECAP:

A single-price monopoly is a firm that must sell

each unit of its output for the same price to all its
customers.
 Price Discrimination Monopoly
• Price discrimination – the practice of charging different
prices for the same product or service based on various
factors such as the buyer’s willingness to pay, locations,
age, or income level.
• Monopoly price discrimination – a single company has
control over the supply of a particular product or service,
allowing it to manipulate prices in different markets or for
different customer segments.
• The main goal of price discrimination for a monopolistic
firm is to maximise its profits by extracting as much
consumer surplus as possible.
Conditions and Types of Price
Discrimination

Separation
No resale of
of customer
the product
groups

Varying
demand
elasticities
 Conditions and Types of Price
Discrimination

First-degree price Second-degree price

Third-degree price
discrimination (perfect discrimination (batch
discrimination
price discrimination) price discrimination)
• ??? • ??? • ???
• Eg??? • Eg??? • Eg???
Consumer Surplus, Price Discrimination and Profit and Profit
Maximising with Perfect Price Discrimination
 Consumer Surplus, Price Discrimination and Profit
and Profit Maximising with Perfect Price
Discrimination
Profit under single price monopolist: P1,A,B,ATC1
Profit under perfect price discrimination: D,A,B,ATC1

Profit after perfect price discrimination > Profit before perfect price discrimination

In a monopoly, all the social welfare go to the monopolist.

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