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Monopoly Chapter 12 Laugher Curve The First Law of Economics: For every economist, there exists an equal and opposite economist. The Second Law of Economics: Theyre both wrong. Introduction Monopoly is the polar opposite of perfect competition. Monopoly is a market structure in which a single firm makes up the entire market. Introduction Monopolies exist because of barriers to entry into a market that prevent competition. Introduction Legal barriers, such as patents, prevent others from entering the market until the patent expires. Introduction Natural barriers – where the firm has economies of scale to produce what others cannot duplicate. The Key Difference Between a Monopolist and a Perfect Competitor For a competitive firm, marginal revenue equals price. For a monopolist it does not. The monopolist takes into account the fact that its production decision can affect price. The Key Difference Between a Monopolist and a Perfect Competitor A competitive firm is too small to affect the price. The Key Difference Between a Monopolist and a Perfect Competitor A competitive firms marginal revenue is the market price. A Model of Monopoly How much should the monopolistic firm choose to produce if it wants to maximize profit? The Monopolist’s Price and Output Numerically The first thing to remember is that marginal revenue is the change in total revenue that occurs as a firm changes its output. The point is not to maximize total revenue but to maximize total profit. The Monopolist’s Price and Output Numerically As in perfect competition, profit for the monopolist is maximized at a point where MC = MR. The Monopolist’s Price and Output Numerically If a monopolist deviates from the output level at which marginal cost equals marginal revenue, profits will fall. Profit Maximization for a Monopolist The Monopolist’s Price and Output Graphically The marginal revenue curve is a graphical measure of the change in revenue that occurs in response to a change in price. It tells us th