Monopoly
Characteristics
-
Single seller or dominate firm in the market
-
No close substitutes
-
Significant barriers to entry
-
Price maker
Demand and Revenue curves of a monopoly
Profit maximization for the monopoly = Economic profit & Loss
-
At the profit maximizing level of output, where MC = MR, the firm is producing at the output level with price Pe and quantity Qmax. At this level of output, the firm is making a profit of Pe * (a-b)
-
At the loss minimizing level of output, where MC = MR, the firm is producing at the output level with price Pe and quantity Qmin. At this level of output, the firm is making a loss of Pe * (c-d)
Revenue maximization by the monopolist
-
At the revenue-maximizing level of output, where MR = 0, the firm is producing at the output level with price Pr and quantity Qr. At this level output, the firm is making a total revenue fo Pr * Qr
Allocative Inefficiency
-
Occurs where P > MC
Productive Inefficiency
-
Occurs where P > minimum ATC
Ways to reduce Monopoly power
-
Since monopoly is producing at neither allocative efficiency nor productive efficiency, monopoly is not preferable for the society, so the government must find ways to regulate and reduce monopoly power
