Natural Monopoly e an industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms A natural monopoly arises when there are economies of scale over the relevant range of output
Natural Monopoly • An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. • A natural monopoly arises when there are economies of scale over the relevant range of output
Economies of scale as a cause o of monopoly. Cost Average total cost 0 Quantity of Output
Average total cost Quantity of Output Cost 0 Economies of Scale as a Cause of Monopoly
Monopoly versus competition Monopoly Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales ° Competitive firm Is one of many producers Has a horizontal demand curve Is a price taker ells as much or as little at same price
Monopoly versus Competition • Monopoly – Is the sole producer – Has a downward-sloping demand curve – Is a price maker – Reduces price to increase sales • Competitive Firm – Is one of many producers – Has a horizontal demand curve – Is a price taker – Sells as much or as little at same price
Demand curves for Competitive and monopoly firms (a)A Competitive Firms (b)A Monopolists Demand curve Demand curve Price Price Demand Demand Quantity 0 Quantity of Output Output
Demand Quantity of Output (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve 0 Price 0 Quantity of Output Price Demand Demand Curves for Competitive and Monopoly Firms
A Monopoly's Revenue ● Total revenue >PXQ=TR o Average revenue >TR/Q=AR=P ● Marginal revenue △TR/△Q=MR
A Monopoly’s Revenue • Total Revenue ➢P x Q = TR • Average Revenue ➢TR/Q = AR = P • Marginal Revenue ➢DTR/DQ = MR