Pure Monopoly

Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
24
C H APT E R
Monopoly Revenues
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms
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Copyright McGraw-Hill/Irwin, 2002
Pure
Monopoly
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Pure
Competition
Key Terms
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End
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24 - 2
FOUR MARKET MODELS

Pure Monopoly:
Single Seller
No Close Substitutes
Price Maker
Blocked Entry
Nonprice Competition
Next
Slide
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum

Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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MONOPOLY EXAMPLES
Pure Monopoly
Regulated Monopoly
Near Monopolies
Dual Objectives of the Study
Monopoly as a Market
Structure
To Better Understand
Other Market Structures
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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BARRIERS TO ENTRY
Economies of Scale
The Natural Monopoly Case
Legal Barriers to Entry

Patents
Licenses
Ownership or Control of
Essential Resources
Pricing and Other Strategic
Barriers to Entry
THE NATURAL MONOPOLY CASE

Four Market Models
Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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Average Total Cost
Barriers to Entry
$20
15
10
ATC
If ATC declines over extended
output, least-cost production is
realized only if there is one
producer - a natural monopoly
50
100
Quantity
200
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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MONOPOLY DEMAND
3 Basic Assumptions:
Monopoly Status is Secure
No Governmental
Regulation
Firm Charges the Same
Price for all Units Sold
Market Demand Curve is the
Firms Demand Curve
MONOPOLY DEMAND
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
As price decreases from

$142 to $132...
but revenue will
$142 Loss = $30
increase with the
132
additional
unit sold
Monopoly
Regulated Monopoly
Gain = $132
Key Terms
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MONOPOLY DEMAND
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
As price decreases from

$142 to $132...
but revenue will
$142 Loss = $30
increase with the
132
additional
unit sold
Monopoly
Regulated Monopoly
Key Terms
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Marginal Revenue
Gain = $132
$142 - $30 = $102
will necessarily be
less than price $132
1
MONOPOLY REVENUES & COSTS

Revenue Data
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
0 x $172 = $ 0
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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Cost Data
Average
Total
Cost
Profit +
Total Marginal or
Cost
Cost
loss -
- $100
= - $100

Revenue Data
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Quantity Price
of (Average Total
Marginal
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
Cost
Cost
loss -
0 $172 $ 0
$100 90 - $100
] $162
]
x
1
162 = 162
- 28
$190.00 190 =
Output & Price

Discrimination
Monopoly
MR = $162 0 = $162
MR > MC
Loss Improvement
from -$100 to -$28
Check next unit of
output!
Regulated Monopoly
Key Terms
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MC = $190 100 = $90
Next
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Revenue Data
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Previous
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End
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24 - 11
Quantity Price
of (Average Total
Marginal
0
1
2
3
4
5
6
7
8
9
10
$172 $ 0
]
162 162
]
152 304
]
142 426
]
132 528
]
122 610
]
112 672
]
102 714
]
92 736
]
82 738
]
72 720
Cost Data
Average
Total
Cost
$162
$190.00
142
135.00
122
113.33
102
100.00
82
94.00
62
91.67
42
91.43
22
93.73
2
97.78
- 18
103.00
Profit +
Total Marginal or
Cost
Cost
loss -
$100
]
190
]
270
]
340
]
400
]
470
]
550
]
640
]
750
]
880
]
1030
90
80
70
60
70
80
90
110
130
150
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310

Revenue Data
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Can0 you
$172see
$ profit
0
] $162
1
162 162
maximization?
] 142
Monopoly
Regulated Monopoly
Key Terms
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End
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24 - 12
Quantity Price
of (Average Total
Marginal
Next
Slide
2
3
4
5
6
7
8
9
10
152
142
132
122
112
102
92
82
72
304
] 122
426
] 102
528
] 82
610
] 62
672
] 42
714
] 22
736
]
2
738
] - 18
720
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
Cost
Cost
loss -
$100 90 - $100
]= MC
MR
>
- 28
$190.00 190 80
]
135.00 270 70 + 34
]
113.33 340 60 + 86
]
100.00 400 70 + 128
]
94.00 470 80 + 140
]
91.67 550 90 + 122
]
91.43 640 110 + 74
]
93.73 750 130
- 14
]
97.78 880 ] 150 - 142
- 310
103.00 1030

Revenue Data
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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End
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24 - 13
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Quantity Price
of (Average Total
Marginal
0
1
2
3
4
5
6
7
8
9
10
$172 $ 0
]
162 162
]
152 304
]
142 426
]
132 528
]
122 610
]
112 672
]
102 714
]
92 736
]
82 738
]
72 720
Cost Data
Average
Total
Cost
$162
$190.00
142
135.00
122
113.33
102
100.00
82
94.00
62
91.67
42
91.43
22
93.73
2
97.78
- 18
103.00
Profit +
Total Marginal or
Cost
Cost
loss -
$100
]
190
]
270
]
340
]
400
]
470
]
550
]
640
]
750
]
880
]
1030
90
80
70
60
70
80
90
110
130
150
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310

$200
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Dollars
Four Market Models
Monopoly Revenues
& Costs
150
200
50
Output & Price

Discrimination
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Monopoly
$750
Regulated Monopoly
Key Terms
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Dollars
500
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

$200
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Dollars
Four Market Models
Monopoly Revenues
& Costs
Elastic
150
200
MR
50
Output & Price

Discrimination
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Monopoly
$750
Regulated Monopoly
Key Terms
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Dollars
500
TR
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

$200
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Dollars
Four Market Models
Monopoly Revenues
& Costs
Elastic
Inelastic
150
200
MR
50
Output & Price

Discrimination
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Monopoly
$750
Regulated Monopoly
Key Terms
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Dollars
500
TR
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
OUTPUT AND PRICE DETERMINATION

Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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Cost Data
MR = MC Rule
No Monopoly Supply Curve
Monopoly Pricing
Misconceptions
Not Highest Price
Total, Not Unit, Profit
Possibility of Losses
Graphically
Profit Maximization Under Monopoly

Four Market Models
Monopoly Examples
Remember
the
MR=MC
Rule?
200
Barriers to Entry
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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Profit
Per Unit
175
Price, costs, and revenue
The Natural
Monopoly Case
150
$122 125
$94
MC
Profit
100
ATC
D
75
50
MR = MC
25
0
MR
5
10
Profit Maximization Under Monopoly

Four Market Models
200
Monopoly Examples
Barriers to Entry
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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Profit
Per Unit
175
The Natural
Monopoly Case
150
MC
What About
$122
Loss
Minimization?
Profit
ATC
$94
125
100
75
50
MR = MC
25
0
MR
5
10
Loss Minimization Under Monopoly

Four Market Models
200
Monopoly Examples
Since Pm exceedsLoss
AVC,
Per Unit
the firm will produce
Barriers to Entry
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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175
The Natural
Monopoly Case
MC
ATC
AVC
150
A
Loss
125
Pm
V
100
75
50
MR = MC
25
0
MR
5
Qm
10
Loss Minimization Under Monopoly

Four Market Models
200
Monopoly Examples
Loss
Per Unit
Barriers to Entry
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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175
The Natural
Monopoly Case
What
are
the
A
P
Economic Effects
V
of Monopoly? D
MC
ATC
AVC
150
Loss
125
100
75
50
MR = MC
25
0
MR
5
Qm
10
INEFFICIENCY OF PURE MONOPOLY

P An industry in pure competition S = MC
sells where supply and
Four Market Models
demand are equal
Monopoly Examples
Barriers to Entry
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Pm
Output & Price

Discrimination
Pc
Monopoly
Regulated Monopoly
Key Terms
D
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MR
Qm
Qc
INEFFICIENCY OF PURE MONOPOLY

P
S = MC
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
At MR=MC
A monopolist
will sell less
Pm Monopoly pricing effectively
units at a
higher
price
Pccreates an income transfer
from
than in
buyers to the seller!
competition
Regulated Monopoly
Key Terms
D
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MR
Qm
Qc
COST COMPLICATIONS
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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24 - 24
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Average total costs
Four Market Models
Economies of Scale
Simultaneous Consumption
Network Effects
X-Inefficiency Inefficient internal
ATCx
operation leads to
higher-thannecessary costs
X
ATC1
ATCx
ATC2
Q1 Quantity
Q2
Average
Total Costs
COST COMPLICATIONS
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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Economies of Scale
Simultaneous Consumption
Network Effects
X-Inefficiency
Rent-Seeking Expenditures
Rent-Seeking Behavior
Technological Advance
Assessment and Policy Options
Antitrust Action
Regulate Natural Monopoly
Ignore it, if it is Short-Lived
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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PRICE DISCRIMINATION
Conditions
Monopoly Power
Market Segregation
No Resale
Consequences
More Profit
More Production
Graphically
Four Market Models
Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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24 - 27
Price and Costs
Barriers to Entry
Economic profits with

a single MR=MC
price
ATC
Next
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MR
MC
Q1
D
Q
Four Market Models
Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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End
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24 - 28
Price and Costs
Barriers to Entry
A perfectly discriminating
monopolist has MR=D,
producing more product
and more profit!
MC
ATC
MR=D
D
Next
Slide
Q1
Q2
Four Market Models
Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
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End
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24 - 29
Price and Costs
Barriers to Entry
Economic profits with

price discrimination
MC
ATC
MR=D
D
Next
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Q1
Q2
Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
End
Show
24 - 30
Rate Regulation
Socially Optimum Price
P = MC
Fair-Return Price
P = ATC
Key Terms
Previous
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REGULATED MONOPOLY
Natural Monopolies
Next
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Dilemma of Regulation
Graphically
REGULATED MONOPOLY
P
Four Market Models

Monopoly Examples
Monopoly Price
MR = MC
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Price and Costs
Barriers to Entry
Pm
ATC
MC
D
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End
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24 - 31
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MR
Qm
REGULATED MONOPOLY
P
Four Market Models

Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Price and Costs
Barriers to Entry
Fair-Return Price
Normal Profit Only
ATC
MC
Pf
D
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24 - 32
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MR
Qf
REGULATED MONOPOLY
P
Four Market Models

Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Price and Costs
Barriers to Entry
Socially-Optimum
Price
P = MC
ATC
MC
Pr
D
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End
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24 - 33
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MR
Qr
REGULATED MONOPOLY
P
Four Market Models

Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Fair-Return Price
Price and Costs
Barriers to Entry
MR = MC Which Price?
Pm
Socially-Optimum
Price
ATC
MC
Pf
Pr
D
Previous
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End
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24 - 34
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MR
Qm
Qf
Qr
REGULATED MONOPOLY
P
Four Market Models

Monopoly Examples
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Price and Costs
Barriers to Entry
Pm
Pf
Pr
MR = MC Which Price?
Fair-Return Price
ChapterSocially-Optimum
Price
Conclusions MCATC
D
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MR
Qm
Qf
Qr
pure monopoly
barriers to entry
simultaneous consumption
network effects
X-inefficiency
rent-seeking behavior
price discrimination
socially optimal price
fair-return price
Copyright McGraw-Hill/Irwin 2002
BACK
END
Next
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Monopoly
Regulated Monopoly
Key Terms
Previous
Slide
End
Show
24 - 37
Monopolistic
Competition
& Oligopoly
Next
Slide
Chapter 25

Pure Monopoly

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Four Market Models

Copyright McGraw-Hill/Irwin, 2002

Four Market Models

FOUR MARKET MODELS

Market Structure Continuum

Four Market Models

Four Market Models

Legal Barriers to Entry

THE NATURAL MONOPOLY CASE

Average Total Cost

Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Four Market Models

As price decreases from

Copyright McGraw-Hill/Irwin, 2002

Four Market Models

As price decreases from

Copyright McGraw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS

Copyright McGraw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS

Output & Price

MC = $190 100 = $90

Copyright McGraw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS

Copyright McGraw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS

Copyright McGraw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS

Copyright McGraw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS

Four Market Models

Output & Price

MONOPOLY REVENUES & COSTS

Four Market Models

Output & Price

MONOPOLY REVENUES & COSTS

Four Market Models

Output & Price

OUTPUT AND PRICE DETERMINATION

Copyright McGraw-Hill/Irwin, 2002

OUTPUT AND PRICE DETERMINATION

Profit Maximization Under Monopoly

Price, costs, and revenue

Copyright McGraw-Hill/Irwin, 2002

OUTPUT AND PRICE DETERMINATION

Profit Maximization Under Monopoly

Price, costs, and revenue

Copyright McGraw-Hill/Irwin, 2002

OUTPUT AND PRICE DETERMINATION

Loss Minimization Under Monopoly

Price, costs, and revenue

Copyright McGraw-Hill/Irwin, 2002

OUTPUT AND PRICE DETERMINATION

Loss Minimization Under Monopoly

Price, costs, and revenue

Copyright McGraw-Hill/Irwin, 2002

INEFFICIENCY OF PURE MONOPOLY

Four Market Models

demand are equal

Output & Price

INEFFICIENCY OF PURE MONOPOLY

Four Market Models

Average total costs