Economics
Monopoly Profit
Monopoly profit refers to the excess revenue earned by a company that holds a monopoly in a particular market. This occurs when the firm can set prices higher than the competitive level due to its market power. Monopoly profit is a key feature of monopoly markets and can lead to inefficiencies and reduced consumer surplus.
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10 Key excerpts on "Monopoly Profit"
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
4. Why would someone want to have a monopoly in some business or activity? A monopolist can earn above-normal profits in the long run. 550 Chapter 25 Monopoly Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 25-3c Supply and the Monopoly Firm For the firm in perfect competition, the supply curve is that portion of the marginal cost curve that lies above the average-cost curve, and the market-supply curve is the sum of all the individual firms’ supply curves. The supply curve for the firm selling in any of the other market structures is not as straightforward to derive, and, therefore, neither is the market supply curve. FIGURE 4 Profit Maximization for the iPod Seller (b) Operating at a Loss ATC MC Quantit y (number of iPods) P Q MR D Loss Quantity (number of iPods) Price per iPod (dollars) Price per iPod (dollars) (a) Making a Profit ATC MR MC D 1 190 3 5 8 9 170 150 130 110 90 70 50 0 Profit 2 4 6 7 (1) (3) (4) (5) (6) (7) (8) Total (2) Total Total Total Marginal Marginal Average Output Price Revenue Cost Profit Revenue Cost Total Cost ( Q ) ( P ) ( TR ) ( TC ) ( TR TC ) ( MR ) ( MC ) ( ATC ) 0 $175 $ 0 $100 $100 1 $170 $ 170 $200 $ 30 $170 $100 $200 2 $165 $ 330 $280 $ 50 $160 $ 80 $140 3 $160 $ 480 $350 $130 $150 $ 70 $117 4 $155 $ 620 $400 $220 $140 $ 50 $100 5 $150 $ 750 $450 $300 $130 $ 50 $ 90 6 $145 $ 870 $520 $350 $120 $ 70 $ 87 7 $140 $ 980 $600 $380 $110 $ 80 $ 86 8 $135 $1,080 $700 $380 $100 $100 $ 88 9 $130 $1,170 $900 $270 $ 90 $200 $100 The data listed in the table are plotted in 4(a).
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
CHAPTER 11 279 Monopoly Memorable Quote “I think that it’s wrong that only one company makes the game Monopoly.” —Steven Wright, comedian In perfect competition, firms are price takers. In other words, firms are numerous enough to ensure that no single seller affects the market price. Monopoly is the polar opposite of perfect competition in that it describes a market with a single seller. A monopoly firm faces the market demand curve for its product because it is the sole seller of the product. Since it faces the market demand curve, the monopoly firm has control over the market price: it can choose any price–quantity combination on the market demand curve. What price and output level should a profit-maximizing monopoly firm select? We will see that, relative to perfect competition, monopoly results in a higher price and a lower quantity. This has efficiency implications, and we discuss why it is illegal in the United States to monopolize a market. Although pure monopoly is rare, markets where a small number of firms compete with one another are common. Chapters 13 and 14 more fully explore the strategic interactions between firms in such markets. In general, however, the firms may have some monopoly power: some control over price, some ability to set price above marginal cost. This chapter discusses the determinants of monopoly power, how to measure it, and its implications for product pricing. monopoly a market with a single seller monopoly power some ability to set price above marginal cost Learning Objectives • Define monopoly and show what a monopolist’s demand and marginal revenue curves look like. • Explain why a monopolist’s profit-maximizing output is where marginal revenue equals marginal cost. Describe why the extent to which a monopolist’s price exceeds marginal cost is larger the more inelastic the demand faced by the monopolist.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Learning Press(Publisher)
A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market. • Profit Maximization - A PC firm maximizes profits by producing where price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs. The rules are not equivalent. The demand curve for a PC firm is perfectly elastic - flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P. • P-Max quantity, price and profit - If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would raise prices, cut production, and realise positive economic profits. • Supply Curve - in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists. A monopolist cannot trace out a short run supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note a change in demand can lead to changes in prices with no change in output, changes in output with no change in price or both. Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply curve would be the price/quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply point would be established. The locus of these points would not be a supply curve in any conventional sense.
eBook - PDFEconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
These losses are referred to by economists as the deadweight loss or efficiency loss of monopoly. To summarize this discussion of the consequences of monopoly: Because it is protected from entry, a monopoly firm may earn positive economic profits; that is, profits in excess of the opportunity cost of capital. At the same time, monopoly causes inefficiency in resource allocation by producing too little output and charging too high a price. For these rea- sons, some of the benefits of the free market disappear if industries become monopolized. 12-2c Monopoly May Shift Demand or Cost Curves The analysis of monopoly may be more complicated than presented here. For one thing, we have assumed that the market demand curve and the average and marginal cost curves are the same whether the industry is competitive or monopolized. But this may not be the case. The demand curve will be the same if the monopoly firm does nothing to expand its market, but a monopolist may spend more on advertising than its competitive replacements. Under perfect competition, purchasers consider the products of all suppliers in an indus- try to be identical, so no single supplier has any reason to advertise the special features of its product. Advertising to expand the demand for the product as a whole by one firm will bring most of its benefits to the other firms in the industry, because the ads, if they work, will induce customers to buy more of the identical product from among any of its many sellers. But if a monopoly takes over from a perfectly competitive industry, it may very well pay to advertise. If management believes that advertising can make consumers rush to the market to purchase the product whose virtues have been extolled on television, then the firm may allocate a substantial sum of money to accomplish this feat. This type of expen- diture should shift the demand curve outward. The monopoly’s demand curve and that of the competitive industry will then no longer be the same.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
For the monopolist, the distinction between the short run and long run is less relevant. If a monopoly is insulated from competition by high barriers that block new entry, economic profit can persist into the long run. Yet short-run profit is no guarantee of long-run profit. For example, suppose the monopoly relies on a patent. Patents last only so long and even while a product is under patent, the monopolist often must defend it in court (patent litigation has nearly doubled in the last decade). On the other hand, a monopolist may be able to erase a loss (most firms lose money initially) or increase profit in the long run by adjusting the scale of the firm or by advertising to increase demand. A monopolist unable to erase a loss will, in the long run, leave the market. 9-3d “Available for a Limited Time Only” Given the law of diminishing marginal utility, some firms selling a unique product may limit availability to increase its marginal value to the consumer. For example, McDonald’s makes its McRib sandwich “available for a limited time only,” usually in the fall. The same holds for KFC’s Double Down sandwich. And Disney has movies in its vault (such as Cinderella , Dumbo , and Peter Pan ) that appear in theaters from time to time for limited periods. Thus, suppliers sometimes limit availability to enhance product appeal. C H E C K P O I N T How much should a monopolist produce to maximize any profit or minimize any loss? 9-4 Perfect Competition and Monopoly Compared If monopolists are no greedier than perfect competitors (because both maximize profit), if monopolists do not charge the highest possible price (because the highest price would reduce quantity demanded to zero), and if monopolists are not guaranteed a profit (because demand for the product may be weak), then what’s the problem with monopoly? To get a handle on the problem, let’s compare monopoly with the bench-mark established in the previous chapter—perfect competition.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 9 Monopoly 207 equilibrium price appears on the demand curve, no single curve traces points showing unique combinations of both the price and quantity supplied. Because no curve reflects combinations of price and quantity supplied, there is no monopolist supply curve. 9-3c Long-Run Profit Maximization For perfectly competitive firms, the distinction between the short run and the long run is important because entry and exit of firms can occur in the long run, erasing any econom- ic profit or loss. For the monopolist, the distinction between the short run and long run is less relevant. If a monopoly is insulated from competition by high barriers that block new entry, economic profit can persist into the long run. Yet short-run profit is no guarantee of long-run profit. For example, suppose the monopoly relies on a patent. Patents last only so long and even while a product is under patent, the monopolist often must defend it in court (patent litigation has nearly doubled in the last decade). On the other hand, a monopolist may be able to erase a loss (most firms lose money initially) or increase profit in the long run by adjusting the scale of the firm or by advertising to increase demand. A monopolist unable to erase a loss will, in the long run, leave the market. 9-3d “Available for a Limited Time Only” Given the law of diminishing marginal utility, some firms selling a unique product may limit availability to increase its marginal value to the consumer. For example, McDonald’s makes its McRib sandwich “available for a limited time only,” usually in the fall. The same holds for KFC’s Double Down sandwich. And Disney has movies in its vault (such as Cinderella, Dumbo, and Peter Pan) that appear in theaters from time to time for limited periods. Thus, suppliers sometimes limit availability to enhance product appeal.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
The monopolist’s producer surplus is the accumulation of the difference between the monopolist’s price and the marginal cost of each unit it produces. This corresponds to areas B + E + H. Thus, the net economic benefit at the monopoly equilibrium is A + B + E + H. In the perfectly competitive market, consumer surplus is areas A + B + F and producer surplus is areas E + G + H. Net economic benefit under perfect competition is thus A + B + E + F + G + H. The table in Figure 11.16 compares the net benefits under monopoly and perfect competition. It shows that the net economic benefit under perfect competition exceeds the net economic benefit under monopoly by an amount equal to areas F + G. This dif- ference is the deadweight loss due to monopoly. This deadweight loss is analogous to the deadweight losses you saw in Chapter 10. It represents the difference between the net economic benefit that would arise if the market were perfectly competitive and the net benefit attained with the monopoly. In Figure 11.16, the monopoly deadweight loss arises because the monopolist does not produce units of output between 600 and 1,000 for which consumers’ marginal willingness to pay (represented by the demand curve) exceeds marginal cost. Production of these units enhances total economic benefit, but production also reduces the monopolist’s profit. Therefore, the monopolist does not produce them. RENT-SEEKING ACTIVITIES The table in Figure 11.16 might understate the monopoly deadweight loss. Because a monopolist often earns positive economic profits, you might expect that firms would have an incentive to acquire monopoly power. For example, during the 1990s, cable tele- vision companies spent millions lobbying Congress to preserve regulations that limit the ability of satellite broadcasters to compete with traditional cable service. Activities aimed at creating or preserving monopoly power are called rent-seeking activities.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
If the monopolist is required by law to earn zero profits, it will produce that quantity Q Z at which the demand price is equal to average cost. The efficient level of output is Q C , where marginal cost equals demand. As the two panels show, Q Z could be either greater or less than Q C . © Cengage Learning MONOPOLY 323 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. exactly covers average cost. However, in each case the efficient level of output is Q C , where a competitive industry would produce. In panel A , a monopolist that is required to earn zero profits will produce too much from the viewpoint of efficiency. In panel B , the monopolist will produce too little. There are additional problems with regulation requiring the monopolist to earn zero profits. One is that such regulation provides the monopolist with no incentive to seek more efficient methods of production. If a new technology would lower the average cost and if the result of this is that the monopolist must lower its price accordingly, then there is no reason for it to adopt the new technology. 10.2 Sources of Monopoly Power We turn now to the question of why monopolies arise in the first place. The answers will make it necessary to modify some of our welfare analysis. Natural Monopoly Suppose you want to produce a new word processing program. Your fixed costs (the costs of developing the software) are likely to be quite high, but your marginal costs (the costs of copying the software onto discs) will be extremely low.
eBook - PDF- J. R. Clark(Author)
- 2014(Publication Date)
- Academic Press(Publisher)
some firms would leave the industry for opportunities where economic profits exist c. firms would more than likely be earning accounting profits d. all of the above would be true. 7. In the case of natural monopoly, if the producing firm were broken into several smaller competing firms, which of the following could be expected to occur? a. Each of the smaller firms would have higher per unit production costs. b. Prices paid by the consumer would fall as a result of competition in the industry. c. Each of the smaller firms would be able to take advantage of economies of scale. d. none of the above 8. The perfect competitor maximizes profit by producing where marginal cost equals price. The monopolist differs from this behavior in that: a. in a monopoly, price is higher than marginal revenue b. the monopolist sets output by MR = MC and then charges the highest price consumers are willing to pay for that amount of output. c. Both a and b are correct. d. None of the above are correct. 114 Chapter Thirteen SECTION THREE Vocabulary Self-Test 1. '. is characterized by rivalry between firms, each trying to provide a better deal to buyers when price, quality, and product information are considered. 2. A large number of firms that produce a homogeneous product in an industry with ease of entry and exit characterizes the model of . 3. A product of one firm that is no different from the product of every other firm in the industry is . 4. are obstacles that prevent potential rival firms from freely entering an industry. 5. Sellers facing a horizontal demand curve are , who must adopt the market price in order to sell their product. 6. The change in total revenue derived from the sale of one additional unit of a product is 7. The temporary closing of a business with the intent to reopen in the future is a , during which fixed costs are still incurred. 8. is the permanent exit of a firm from the market; it is characterized by the sale of the firm's assets.
eBook - PDFTest Bank for Introductory Economics
And Introductory Macroeconomics and Introductory Microeconomics
- John G. Marcis, Michael Veseth(Authors)
- 2014(Publication Date)
- Academic Press(Publisher)
Economic theory would suggest that if 55. At the profit-maximizing level of output, the monopoly producer will have average (per unit) profits of: (547), (155) PRODUCER CHOICES: MONOPLY 2 1 1 a. $9.00 B. $5.00 c. $4.00 d. $7.00 e. not enough information has been provided. 56. A profit-maximizing monopolist will be earning maximum economic profits if: (547), (155) A. marginal revenue equals marginal cost which is less than average total cost. b. marginal revenue equals average total cost which is greater than marginal cost. c. marginal cost equals average total cost which is less than marginal revenue. d. marginal cost is less than marginal revenue which is less than average total cost. e. marginal revenue is less than average total cost which is less than marginal cost. 57. Suppose that two brothers, J.R. and Bobby, owned and operated a company which was a monopoly producer. Although J.R. desired to be a profit maximizer, Bobby desired to maxi-mize total revenue. J.R. desires to produce that rate of output where and Bobby desires to produce that rate of output where (547-548), (155-156) a. Marginal revenue equals marginal cost; 60. marginal revenue equals marginal cost. b. Marginal revenue equals zero; marginal revenue equals marginal cost. C. Marginal revenue equals marginal cost; marginal revenue equals zero. d. Marginal revenue equals zero; marginal revenue equals zero. e. Marginal cost equals zero; marginal rev-enue equals marginal cost. Use the diagram to the above right in responding to the 61. next three questions. The diagram is for the XYZ Company, a monopoly producer. 58. At the profit-maximizing level of output, the XYZ Company produces units of output and charges per unit. (547), (155) a. 30; $5.00. b. 40; $6.00. C. 30; $10.00. d. 60; $10.00. e. 50; $9.00. 59. At the profit-maximizing level of output, the total cost of production is: (547), (155) a.
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