Why do monopolies exist?
Because of barriers to entry, such as control of a key resource, government-created monopolies (patents, licenses), or strong economies of scale (natural monopoly).
Mention two examples of economic barriers to enter a market.
Large economies of scale / very high fixed costs.
High Capital Requirements
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Control/ownership of an essential input or resource.
Compare the marginal revenue of a firm in a competitive market to that of a monopoly.
Competitive firm: (MR = P), constant.
Monopoly: (MR < P) and decreases as quantity increases.
Why is the marginal revenue of a monopoly lower than the price?
To sell more units, the monopolist must lower the price on all units sold (because demand slopes downward), so the extra revenue from one more unit is less than the price.
Define the output and price effect of a monopolist who decides to sell an additional unit of output.
Output effect: The output effect is the increase in the total revenue due to the increase in q.
The price effect is the decrease in total revenue because of the decrease in P.
Why monopolies are not allocatively efficient? In other words, is it there a deadweight loss in a monopolistic market?
They choose quantity where (MR = MC) and then charge a price above marginal cost, producing less than the socially efficient quantity where (P = MC).
Yes, this creates a deadweight loss: mutually beneficial trades that don’t happen.
What is the deadweight loss of a monopoly?
The loss in total surplus (consumer + producer surplus) from the monopolist’s lower output, graphically the triangle between the demand curve and the marginal cost curve between the monopoly quantity and the competitive quantity.
Compare profits, quantity and prices of a market served by perfectly competitive firms and the same market served by a monopolist.
Monopoly: higher price, lower quantity, and (typically) positive economic profits in the long run.
Perfect competition: lower price, higher quantity, and zero economic profit in the long run.
What is price discrimination?
Charging different prices to different customers (or groups) for the same good not explained by differences in production cost.
Provide two examples of price discrimination.
Student or senior discounts at cinemas or museums.
Airline tickets priced differently depending on time of purchase or type of traveler (business vs leisure).
Why might price discrimination increase the profits of a monopolist?
It lets the monopolist capture more consumer surplus by charging higher prices to those with higher willingness to pay and lower prices to those with lower willingness to pay, often increasing both quantity sold and total profit.
