so what I wanted to look at today is monopolies remember a monopoly is the case where the market has a single producer there's only one firm in the market okay in essence this exists because there's really high barriers to entry we talked about that prior to the break for a number of different types of reasons and there's no close substitutes for their products no one else produces products you can easily just switch to okay and so this is where a monopoly actually exists and holds Market power and they try really hard to keep themselves being the only firm in the market the objective of monopolies as with every other type of firm in generals to maximize profit okay that has to be a primary objective you got to earn money thus monopolies just like firms in a perfectly competitive market on the other end of the Continuum will still produce where marginal revenue equals marginal cost they'll keep producing up until the money they earn on that last good equals the cost of producing it okay and so they get zero profit they're no longer adding to profit the cost curves for the monopolist are the usual ones we've seen before all the same cost curves so we still have our marginal cost curve we have our average total cost our average variable cost and our average fixed costs I mentioned these would be coming back here they are okay so we will be revisiting our cost curves again okay remember we still have the same points our break even point is where the price is equal to where the marginal cost and average total cost intersect this is the point of zero profits this is your shutdown Point okay what's different with a monopolist is they're the only firm in the market so they do not take prices as given they are pric maker they directly influence prices the demand faced by a monopolis though is not the same as that faced by a perfectly competitive firm what we've assumed up until now recall perfectly competitive firms treat prices as fixed they have no Market power so their marginal revenue is the price they take it as given given and that price is determined by the interaction of supply and demand aggregate behavior in the market okay so firms face a constant demand under perfect competition they sell what they can based on the price and there's not a whole lot of incentive to go do a lot of marketing and figure out demand because you're not big enough and so in Market where we have a supply and demand curve remember the price is the equilibrium price it's what's determined at market equilibrium that price we can also look at the individual firm who's going to make their decision based on their marginal cost curve remember that marginal cost curve is the firm supply curve that's how we we determine by looking at that marginal cost where Mr equals MC right and so it's usually on part of this upward portion it's that upward portion of MC above the average variable cost and zero otherwise okay and so in our case where does that marginal revenue curve come from well it's determined by the price from the market equilibrium that's where their marginal revenue sits and that's where they'll produce okay so market dynamics determine the prices that these custom customers who are small enough just accept they keep track of prices so they can adjust their production decisions but that's about it otherwise they're trying to adopt new technologies become more efficient reduce costs and so on given the monopolist is the only firm in the market they determine the supply curve so market supply is the monopolist supply so that means they directly interact with market demand okay so the monopolis faces the market entire market demand curve so their total revenue is determined by market demand it's not their Mar in essence that's saying their marginal revenue is not fixed it's not constant like it is for a perfectly competitive firm the monopolist has two strategies in the market they can either set a quantity find out what that price is and then use a process of discovery to figure out what people are willing to pay for how much they produce we call that quantity competition or they can go the other way around and set a price and determine how much they can sell given that they can do that they're directly influencing prices in the market and then they'll adjust those prices to maximize their prod profit and so the monopolis sets P or q and then determines the other okay and that's why they're a price maker you need to keep in mind that monopolists aren't completely free to do any darn thing they want people tend to think of this they're still subject to Consumer demand the time they start ignoring consumer demand is the time another company come can come in and start gaining market share ending the Monopoly that's usually what happens in monopolies that have lasted a long time um especially in computer and software industry it's happened a lot firms that have dominant market share are now gone IBM's an example 70s 80s 90s IBM was the Behemoth they're a shadow of what they used to be they were like Amazon Google Microsoft in Colorado they have a 26 acre campus they only operate on less than an acre of that now the other 25 acres of the buildings on that campus are rented out heal at Packard which used to be a giant almost gone so it happens these firms disappear over time and so they have to keep track of consumer demand if they don't they'll lose their Market so to see how the marginal revenues calculated for a monopolis consider a demand curve a little bit different form than we've seen I'm just putting price on the left hand side we call this an inverse demand curve but I'm G to have a demand curve that P equals 20 minus 2 Q we can use this to find total revenue marginal revenue remember total revenue is price times quantity marginal revenue is the change in total revenue over the change in cost if the price is $20 quantity is zero what's total revenue so using that relationship I derive these combinations what's our total revenue there 20 time 0 is zero and marginal revenue is not defined because you can't divide by zero if price is 18 they'll sell one unit what's our total revenue 18 what's and the marginal revenue is also 18 it's our first gain in Revenue so we made $18 that first unit was $18 what's my total revenue for two units 32 right what's the marginal revenue there so if total revenue is 32 what's marginal revenue for the second unit what 32 2 minus 18 which is 14 it's the change in total revenue 14 over the change in output one remember it's the formula up here what's my total revenue at three units of output it's 42 marginal revenue is 42 minus 32 which is 10id one since output's only going up by one at a time and so notice because they face the entire demand curve total revenue is not constant also notice marginal revenue goes negative at some point you can go too far usually we'd say people aren't going to consume at that point even though total revenue is going up notice it maxes out and then starts to fall so marginal revenue is falling the total revenue curve is not a straight line here it's hill-shaped if you graph marginal revenue in essence you can think of it as half of the demand curve in essence it starts at the same point the demand curve starts on this axis and it intersects if demand is linear this marginal revenue curve is linear and intersects halfway between zero and where the demand curve intersects on the quantity axis and so it's steeper than the demand curve and what do we know the firm's going to make their decisions it's impacted by demand but they're making their decisions using marginal revenue but it's directly determined by consumer demand for the entire market so monopolies have to know what their markets look like they need a marketing department that investigates demand not doing that should themselves in the foot and so they'll spend money on marketing even though they're the only firm and advertising and branding notice the big firms or even monopolies still spend a ton of money on advertising and branding that helps them maintain their monopolies longer so to maximize profits the monopolist has to consider both costs and revenues we know the optimals where Mr equals m MC and what's the second part of that rule MC Cuts Mr From Below right still holds so now we bring in demand and marginal revenue unlike with perfect competition the marginal revenue curve was flat and horizontal now marginal revenue is steep and downward sloping and it's deriv directly from the demand curve the rule is still the same it's where Mr equals MC and MC Cuts Mr from below it still follows the same rule every firm follows this Rule and so if you analyze monopolistically competitive firms or oligopolies their their marginal revenue curves are downward sloping they're just less steep than they are for a monopoly but it's similar analysis and so all of a sudden marginal revenue functions now matter price is no longer taken as given so the monopolis will produce where Mr equals MC at qar unlike the perfectly competitive firm though the monopolist will set their price using the demand curve so once they know where to produce they'll go back up to demand to set the equilibrium price in the market P star and so that would be the market price and that's where they maximize their profit their profit if you draw a straight line from the marginal revenue here their profit is this big box their costs are the small box hence we talk about Monopoly profits they're a whole lot higher than they are for perfect competition total so the Monopoly will earn more money overall than the entire industry in a perfectly competitive firm for the same industry that's the point of that's the incentive for the Monopoly is the money amount of money they make and so we get p by once we know our what we should produce go back to demand to figure out the price the demand curve will tell you the price you can charge to get that level of production and so it's still the same rule same process the marginal cost curve like for the perfectly competitive firm the firm's supply curve for the monopolist is the marginal cost curve okay it's still the marginal cost curve above average variable cost and zero otherwise still same definition the difference here is that firm supply curve is market supply this is the market supply curve here and so monopolis will produce where Mr equals MC and MC Cuts Mr from below and once they determine their optimal output from that rule they'll use market demand to find their price okay to say hey how much can we actually charge if we produce this much like with any firm that's a discovery process and it changes over time markets still shift consumer demand Chang is it's not static hence monopolists need to know what's going on in markets too if the monopolis produces greater than qar marginal cost increases faster than marginal revenue they start losing money quickly a lot their profits go down significantly if they produce where Mr is less than MC or sorry when marginal cost cost is greater than marginal revenue and here's your marginal revenue curve once they're in this spot they start earning a lot of money if they're to the left they're giving up money and so there's an incentive to still keep moving toward that point of where Mr equals MC and that's just to say it's still the same story they're going to produce until they can squeeze out all the profit they can earn on the margin so an example consider the market for hydrogen cars in 2025 in which there's one firm in the market so in this case a monopoly exists the demand for hydrogen cars can be given by P equals 20 minus Q where p is the price in thousands and Q is the quantity of cars demanded in thousands of cars information for total revenue marginal revenue and total cost is given in the table to the right or sorry to the left marginal costs is left for you to fill out given this information how much should the monopolis produce so work with the person next to you figure this out e e e e so what did you get 3,000 cars do you all agree well the first thing you should do is calculate that marginal cost marginal cost for the first car is 22 minus 10 is 12 remember total change in total revenue over change in output is marginal revenue or sorry we're looking at marginal cost so the first thing we need do is calculate marginal cost it's change in total cost over change in output so it's our change in total cost over our change in output which is one output's always changing by one and so what's the marginal cost for the second, it is eight the third 10 and so on so notice marginal cost starts to fall and then go back up notice we have the marginal revenue already calculated so we produce in the tables we find the point either we look for the point where Mr equals MC and MC is increasing because we want to cut it from below or Mr is at least greater than or equal to MC right because we might not have the exact point in the table so where does Mr equal MC it occurs at three right Mr is 10 MC is 10 it doesn't happen down here because these are all negative and these are all positive that's where they're going this way that's a bad place to be the difference between these two is the loss and profit for every unit you produce and so we'll produce it where Mr equals MC which is 3,000 cars what's profit there it's not zero it's total revenue minus total costs so in our case it's two so' be 2,000 and so the answer here is B notice this also occurs where marginal cost is increasing so it's cutting it from Below so let's assume our market supply curve is given by the marginal cost curve for the Monopoly okay and zero otherwise if this was a perfectly competitive market where this was the supply curve and this was the demand curve market equilibrium would occur here so let's assume the supply curve for the monopolist and the perfectly competitive firm are the same in that case which they're not going to be obvious L but it'll give you an idea notice at a perfectly competitive firm the equilibrium price would be pble star equilibrium quantity is qou star the monopolis though is going to produce where Mr equals MC at qar in charge P star we already learned that right this just gives you an indication of the difference between these two markets a monopoly is going to charge higher prices than a monopolist or sorry yes than a perfectly competitive firm okay so in a monopoly consumers face much higher prices it tends to be the case is as you decrease competition in market prices go up in addition there's less available of that good quantity produced goes down in more competitive markets it's the reason we have a shortage of game consoles part of that is production issues on supply chain I guarantee you part of it is a decision made by those companies they want those news stories and demand hey there's shortages people are selling them for more money on eBay and people are buying them that just drives up demand and keeps it look how long PlayStation 2 was in demand two years before it of became widely available and now it's everywhere two full Christmases it was backlogged and people couldn't get them they sold out and it was lotteries or stuff like that Sony was probably going yeah this is nice because they could keep the price of their game systems up they're usually game systems dropped in price a year or two after they came out they're still the same price they can do that same with iPhones there's a reason to limit Supply and it's a strategic decision they're not going to outright say that but that's part of the thinking there are remedies in the form so monopolies under federal law cannot form just on they can't a company can't just decide to become a monopoly they have to be approved okay the the first law and act in the US to kind of make sure we protect competition in markets was the Sherman Act of 1890 this made any contract agreement or trust that restricts trade or Commerce among the states or with foreign Nations illegal it also made monopolies illegal and a felony charge that has not changed if you force companies out of business or buy them and then shut them down so you can get a mon that is illegal it is a crime in the US to do that you cannot force a monopoly in the market and so the Sherman Act didn't Outlaw the existence of a monopoly they can form the government has formed them as long as it naturally arises in the market the problem is do they naturally arise they do in cases of utility companies just because of the amount of invest investment and capital required the Sherman Act was followed up by The Clayton Act of 1914 to clear up confusion in that act and spell out it made tying contracts illegal that means companies couldn't force their input so really monopolies tend to have downward pressure on markets their suppliers and they can control those as well and they can tie them into contracts that force them into certain um arrangements to lower their costs Walmart does this they've also come under legal action because of it they can't tie people they have to let the market have competition so forcing a customer to buy one product to get another Microsoft went to court for that um this ban mergers that limit competition there's tons of mergers a lot of big mergers get banned more than people know and it outlawed and we don't get into this price discrimination you cannot charge different prices to different groups of people it is il leg and there are different types of price discrimination and it occurs it still occurs to this day in The Clayton Act they formed the Federal Trade Commission this is a body that was set up to enforce those two acts so this is the legal governmental agency that enforces these two in the Anti-Trust laws antitrust laws the courts are the ones who adjudicate cases they can forbid the Contin uation of illegal activities they can force defendants to pay back profits they can break up companies and they can send people to jail okay and they try to restore those competitive conditions okay with that um so remember my last hint you have to email questions to me otherwise have an awesome day we'll see you all on Wednesday h