Lecture Notes: Chapter 12 – Monopoly
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
A monopoly is a market structure where a single firm controls the entire supply of
a good or service with no close substitutes. Unlike perfectly competitive firms,
monopolies have the power to set prices, restrict output, and earn long-run
economic profits. This chapter explores how monopolies arise, how they
determine price and output, how they compare to competitive markets in terms of
efficiency, how price discrimination can increase profits, and how governments
regulate monopolies to improve economic outcomes.
1. How Monopoly Arises
A monopoly arises when barriers to entry prevent other firms from entering the
market. These barriers may include:
1.1 Legal Barriers
Public franchises: Government grants exclusive rights (e.g., Canada Post
for regular mail).
Licensing: Only authorized firms may operate (e.g., taxi medallions).
Patents and copyrights: Protect innovation and intellectual property (e.g.,
pharmaceutical companies with patented drugs).
1.2 Natural Monopoly
Occurs when economies of scale are so extensive that a single firm can supply
the entire market at a lower cost than multiple firms.
Example:
A city’s water distribution system involves high infrastructure costs but low marginal
costs, making one provider more efficient.
Graph Description – Natural Monopoly:
X-axis: Quantity of output
Y-axis: Cost and price
The long-run average cost (LRAC) curve slopes downward across the
entire market, meaning one firm can produce at a lower cost than any
combination of smaller firms.
2. Single-Price Monopoly: Price and Output Determination
, A single-price monopoly charges the same price to all customers for each unit
sold. The firm has market power, but it must still consider the demand curve—it
cannot set both price and quantity independently.
Revenue Concepts:
Total Revenue (TR) = Price × Quantity
Average Revenue (AR) = Price
Marginal Revenue (MR) = Change in TR from selling one more unit
Because the monopolist must lower the price to sell more, MR < Price.
Graph Description – Monopoly Pricing:
X-axis: Quantity
Y-axis: Price, cost, and revenue
Demand curve (D): Downward sloping
MR curve: Lies below the demand curve
MC curve: U-shaped (as in competition)
Profit-Maximizing Output
The monopolist produces where:
Then, it sets the price on the demand curve corresponding to that quantity.
Steps:
1. Find where MR = MC to determine output.
2. Use the demand curve to find the price for that output.
3. Calculate ATC at that quantity to find economic profit:
Example:
Suppose a pharmaceutical company has a monopoly on a new drug. It calculates
that at 100 units, MR = MC. At 100 units, the price on the demand curve is
$200, and ATC is $120.
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
A monopoly is a market structure where a single firm controls the entire supply of
a good or service with no close substitutes. Unlike perfectly competitive firms,
monopolies have the power to set prices, restrict output, and earn long-run
economic profits. This chapter explores how monopolies arise, how they
determine price and output, how they compare to competitive markets in terms of
efficiency, how price discrimination can increase profits, and how governments
regulate monopolies to improve economic outcomes.
1. How Monopoly Arises
A monopoly arises when barriers to entry prevent other firms from entering the
market. These barriers may include:
1.1 Legal Barriers
Public franchises: Government grants exclusive rights (e.g., Canada Post
for regular mail).
Licensing: Only authorized firms may operate (e.g., taxi medallions).
Patents and copyrights: Protect innovation and intellectual property (e.g.,
pharmaceutical companies with patented drugs).
1.2 Natural Monopoly
Occurs when economies of scale are so extensive that a single firm can supply
the entire market at a lower cost than multiple firms.
Example:
A city’s water distribution system involves high infrastructure costs but low marginal
costs, making one provider more efficient.
Graph Description – Natural Monopoly:
X-axis: Quantity of output
Y-axis: Cost and price
The long-run average cost (LRAC) curve slopes downward across the
entire market, meaning one firm can produce at a lower cost than any
combination of smaller firms.
2. Single-Price Monopoly: Price and Output Determination
, A single-price monopoly charges the same price to all customers for each unit
sold. The firm has market power, but it must still consider the demand curve—it
cannot set both price and quantity independently.
Revenue Concepts:
Total Revenue (TR) = Price × Quantity
Average Revenue (AR) = Price
Marginal Revenue (MR) = Change in TR from selling one more unit
Because the monopolist must lower the price to sell more, MR < Price.
Graph Description – Monopoly Pricing:
X-axis: Quantity
Y-axis: Price, cost, and revenue
Demand curve (D): Downward sloping
MR curve: Lies below the demand curve
MC curve: U-shaped (as in competition)
Profit-Maximizing Output
The monopolist produces where:
Then, it sets the price on the demand curve corresponding to that quantity.
Steps:
1. Find where MR = MC to determine output.
2. Use the demand curve to find the price for that output.
3. Calculate ATC at that quantity to find economic profit:
Example:
Suppose a pharmaceutical company has a monopoly on a new drug. It calculates
that at 100 units, MR = MC. At 100 units, the price on the demand curve is
$200, and ATC is $120.
