Chap 15

Slide 3
Hello everyone, I will responsible of this part in chapter 15. In the pevious chapter, we
analyzed competitive markets, many firms offer essentially identical products, so they
have little influence over the price they receives. And in this chapter, we will discuss
about Monopoly, for these firms, they don’t have close competitores, so they can
influence the market price of their product.
Market power is the ability of a company, industry, or group of producers to influence the
prices or quantities of products without being significantly influenced by other companies
or consumers. And market power alters the relationship between a firm’s costs and the
selling price.
For many competitive firm, they charge the price equals marginal cost, by contrast, a
monopoly charges a price that exceeds marginal cost. For example, Microsoft, they sell
their product for $100. However only they provide this operating system in the market, so
why don't they sell it at a higher price like 1000$, because if Microsoft were to set the
price that too high, fewer people would buy the product, so a high price reduces the
quantity purchased.
Monopoly also like competitive firm, they aim to maximize profit, because monopoly
firms are unchecked by competition, the outcome in a market is often not in the best
interest of society.
Slide 4
Governments can sometimes improve market outcome. A firm is a monopoly if it is the
sole seller of its product and if its product does not have any close substitutes.
Monopolies firm is price maker because can influence the market price of their products.
And the fundamental cause of monopoly is barriers to entry.
Slide 5
A monopoly remains the only seller in its market because other firms cannot enter the
market and compete with it. There are 3 main sources: the 1st is Monopoly resources, the
2nd is Government regulation, and the 3rd is production process: it is A single firm can
produce output at a lower cost than an a larger number of firms.
Slide 6
Monopoly resources is A key resource required for production is owned by a single firm.
I get an example in the textbook, the market for water in the small town. If there is only 1
supplier in town and it is impossible to get water from anywhere else, so, the owner has a
monopoly on water. And for necessity like water, they can command a high price for
water (even if the marginal cost is low).
Slide 7
Next is Government regulation. Government gives a single firm the exclusive right to
produce some good or service. Patent and copyright laws are two important
examples.When a pharmaceutical company find out a new drug, they will apply to the
government and earn the patent. So, only this company has a right to produce this drug.
As for copyright, when a novelist complete a book, she can copyright it, so only her has a
right to print and sell the work. Because these laws give one producer a monopoly, they
lead to higher prices and higher profits than would occur under competition.
Slide 8 and 9
Next is natural monopolies. It is single firm can supply a good or service to the entire
market at a lower cost than could two or more firms. Economies of scale mean when the
average total cost of producing a unit of a good or service decreases as the scale of
production increases. You can look at this graph, when production is divided among more
firms, each firm produces less, and average total cost rises. And for single firm, they can
produce any given amount at the lowest cost.
The welfare cost of monopolies
Slide 23
In chapter 7, we learnt the consumer surplus, producer surplus and total surplus. For total
surplus, it is Economic well-being of buyers and sellers in a market and it equals Sum of
consumer surplus and producer surplus. Consumer surplus is consumers' willingness to
pay for a good minus the amount they actually pay for it.
Slide 24
Producer surplus is the amount producers receive for a good minus their costs of
producing it.
Now we consider the case that monopoly firm were run by a benevolent social planner.
The social planner cares not only about the profit earned by the firm's owners but also
about the benefits received by the firm's consumers. They try to maximize total surplus.
Slide 25
You can look at figure 7, The demand curve reflects the value of the good to consumers.
The marginal-cost curve reflects the costs of the monopolist. The quantity is found where
the demand curve and the marginal-cost curve intersect. Below this quantity, the value of
an extra unit to consumers exceeds the cost of providing it, so increasing output would
raise total surplus. Above this quantity, the cost of producing an extra unit exceeds the
value of that unit to consumers, so decreasing output would raise total surplus. Because
total surplus will reach its maximum value at the point that is the intersect of demand and
marginal cost curve.
Slide 26
Now consider if the social planner were running the monopoly
Slide 27
The monopolist chooses to produce and sell the quantity of output at which the marginal-
revenue and marginal-cost curves intersect. When. monopolist charge a price above
marginal cost, som potential consumers value the good at more than its marginal cost.
These consumer do not buy the good, the value they place on the good exceeds the firm’s
cost of providing it to them, this result in ineffficient. The inefficiency of monopoly can
be measured with a dead weight loss triangle. The area of deadweight loss is between
demand curve and marginal cost curve.
Slide 28
Welfare in a monopolized market, as in all markets, includes the welfare of both
consumers and producers. Whenever a consumer pays an extra dollar, the consumer is
worse off, the producer is better off. Because total surplus equals the sum of consumer
and producer surplus, this transfer from consumers to the owners of the monopoly does
not affect the market's total surplus.

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