Monopoly Economics: Key Concepts

Definition and Characteristics of Monopoly

• Monopoly: Exists when a single firm sells a unique product.
  • Firm acts as price maker, not a price taker.
  • Inefficient compared to perfectly competitive markets.
  • Results in higher prices and lower output.
• Economic Profits: Monopolies can sustain high economic profits in the long run.
  • Due to high barriers to entry.
  • Economies of scale enable monopolies to dominate the market.
• Example: Utility companies like electricity providers.

Graphical Representation

• Demand Curve: Downward sloping, represents entire industry's demand.
• Marginal Revenue Curve: Also downward sloping and below the demand curve.
• Profit Maximization: Occurs where MR (Marginal Revenue) equals MC (Marginal Cost).
• Economic Loss: When price falls below the average total cost curve at MR = MC.

Inefficiencies of Monopolies

• Dead Weight Loss: Results because price > marginal cost (allocative inefficiency).
  • Society loses potential surplus between monopoly and competitive output.
• Productive Efficiency: Not achieved as ATC is not at a minimum at profit-maximizing output.
• Consumer Surplus: Reduced compared to perfectly competitive markets.
  • Some consumer surplus transfers to producer, rest becomes dead weight loss.

Regulation and Efficiency

• Socially Optimal Regulation:
  • Achieved when P = MC (Price equals Marginal Cost).
  • Eliminates dead weight loss, maximizing consumer and producer surplus.
• Fair Return Regulation:
  • Monopoly breaks even when P = ATC (Price equals Average Total Cost).
  • Known as fair return price; zero economic profits but possible positive accounting profits.

Total Revenue Maximization

• Total Revenue maximized where MR = 0.
  • Price elasticity of demand = 1 (unit elastic).

Price Discrimination

• Perfect Price Discrimination:
  • Increases profits by eliminating consumer surplus.
  • Each consumer pays maximum willing price.
  • Leads to more socially efficient output (MC = D).

For further study, resources are available from Mr. Medo Doino. This concludes the review on monopolies.