Lecture Notes: Monopolies

Introduction

• Lecture by Mr. Clifford from ACDC Econ.
• Topic: Monopolies.
• Monopolies differ from perfect competition due to their market power.

Characteristics of Monopolies

• Unique Good: No close substitutes available.
• Price Maker: Unlike perfect competition, where firms are price takers.
• High Barriers to Entry: Prevent other firms from entering and competing.

Monopoly Graph Explanation

• Demand Curve: Not horizontal as in perfect competition.
• Marginal Revenue (MR) Curve: Below the demand curve.
  • Monopolies cannot price discriminate; lowering prices for one unit affects all units.
• Marginal Cost (MC) and Average Total Cost (ATC) Curves: Similar to perfect competition.

Profit Maximization

• Profit Maximizing Quantity (Q1): Where MR = MC.
• Charge price where demand curve is (P2), not at MR.
• Total Revenue (TR): Price x Quantity; Rectangle formed by P2, A, Q1, Q0 on graph.
• Total Cost: Determined by ATC curve.
• Profit: Difference between total revenue and total cost.

Long Run Profit

• High barriers prevent entry of new firms, allowing sustained long-term profits.

Consumer Surplus

• Difference between what is paid and what consumers are willing to pay.
• Monopoly Consumer Surplus: Triangle P1, A, P2.

Revenue Maximization

• Revenue Maximizing Quantity (Q2): Where MR = 0.
• Total Revenue is maximized when MR = 0.
• Firms focus on profit maximization (MR = MC) over revenue.

Elasticity and Total Revenue Test

• Elastic Range: MR positive; demand segment P1 to B; Quantity < Q2.
• Inelastic Range: MR negative.

Socially Optimal Quantity

• Socially Optimal Quantity (Q3): Where price equals marginal cost.
• Monopolies do not produce at Q3, leading to inefficiency and deadweight loss.

Reasons for Government Regulation

• Deadweight Loss: Caused by monopolies producing less and charging more.
• Regulation can force production at socially optimal quantity (Q3).

Break-even Point

• Quantity (Q4): Where price equals ATC; no economic profit.

Impact of Taxes

• Per Unit Tax: Increases MC, decreases quantity, increases price.
• Lump Sum Tax: Affects fixed costs; does not change price or quantity.

Conclusion

• Understanding monopoly graphs and concepts can help in analyzing market inefficiencies.
• Look forward to next topics on oligopolies and game theory.
• Encourage further engagement and subscription for learning more on imperfect competition.