Chapter 8: Market Structure: Monopoly and Monopolistic Competition 80
CHAPTER 8: MARKET STRUCTURE: MONOPOLY AND
MONOPOLISTIC COMPETITION
OUTLINE OF TEXT MATERIAL
I. Introduction
A. The market structures of monopoly and monopolistic competition, along with
oligopoly, are called imperfectly competitive markets.
B. Managers of firms in these markets have varying degrees of market power, or the
ability to influence prices and develop other competitive strategies.
C. The degree of market power is related to the barriers to entry (structural, legal or
regulatory) in a given market.
II. Firms with Market Power
A. Market Power: The ability of a firm to influence the prices of its product and
develop other competitive strategies that enable it to earn large profits over longer
periods of time.
B. The Monopoly Model
1. Monopoly: A market structure characterized by a single firm producing a
product with no close substitutes.
2. Any firm in imperfect competition faces a downward sloping demand
curve, as it is not a price-taker, but a price-setter.
(a) Price Setter: A firm in imperfect competition that faces a downward
sloping demand curve and must set the profit-maximizing price to
charge for its product.
3. To sell more output, an imperfectly competitive firm must lower the price
of the product.
Copyright © 2015 Pearson Education Ltd.
, Chapter 8: Market Structure: Monopoly and Monopolistic Competition 81
4. The marginal revenue curve is downward slopped and separate from the
demand curve.
Teaching Tip: Make sure the students understand the difference between price-
taking and price-setting assumptions. This difference is the key to understanding the
difference in the horizontal versus downward sloping demand curves.
5. The profit-maximizing level of output, QM, is still where the marginal
revenue equals marginal cost. However, the price, PM, that a monopolist
can charge is read directly off the demand curve. As a result, there is so
supply curve in this model. The monopoly determines the profit-
maximizing level of output by equating MC and MR, but the price is
determined by the demand (the highest price at which the output can be
absorbed by the demand).
6. A monopolist can earn positive, zero or negative profits.
7. However, unlike perfect competition, positive economic profits cannot be
competed away through the entry of other firms due to barriers to entry.
8. The monopoly price, PM, is greater than the marginal cost of production.
Copyright © 2015 Pearson Education Ltd.
CHAPTER 8: MARKET STRUCTURE: MONOPOLY AND
MONOPOLISTIC COMPETITION
OUTLINE OF TEXT MATERIAL
I. Introduction
A. The market structures of monopoly and monopolistic competition, along with
oligopoly, are called imperfectly competitive markets.
B. Managers of firms in these markets have varying degrees of market power, or the
ability to influence prices and develop other competitive strategies.
C. The degree of market power is related to the barriers to entry (structural, legal or
regulatory) in a given market.
II. Firms with Market Power
A. Market Power: The ability of a firm to influence the prices of its product and
develop other competitive strategies that enable it to earn large profits over longer
periods of time.
B. The Monopoly Model
1. Monopoly: A market structure characterized by a single firm producing a
product with no close substitutes.
2. Any firm in imperfect competition faces a downward sloping demand
curve, as it is not a price-taker, but a price-setter.
(a) Price Setter: A firm in imperfect competition that faces a downward
sloping demand curve and must set the profit-maximizing price to
charge for its product.
3. To sell more output, an imperfectly competitive firm must lower the price
of the product.
Copyright © 2015 Pearson Education Ltd.
, Chapter 8: Market Structure: Monopoly and Monopolistic Competition 81
4. The marginal revenue curve is downward slopped and separate from the
demand curve.
Teaching Tip: Make sure the students understand the difference between price-
taking and price-setting assumptions. This difference is the key to understanding the
difference in the horizontal versus downward sloping demand curves.
5. The profit-maximizing level of output, QM, is still where the marginal
revenue equals marginal cost. However, the price, PM, that a monopolist
can charge is read directly off the demand curve. As a result, there is so
supply curve in this model. The monopoly determines the profit-
maximizing level of output by equating MC and MR, but the price is
determined by the demand (the highest price at which the output can be
absorbed by the demand).
6. A monopolist can earn positive, zero or negative profits.
7. However, unlike perfect competition, positive economic profits cannot be
competed away through the entry of other firms due to barriers to entry.
8. The monopoly price, PM, is greater than the marginal cost of production.
Copyright © 2015 Pearson Education Ltd.
