403 Monopoly

monopoly_1

The controversial topic of the monopolist is finally here! What is a monopoly? Yes, we all love playing monopoly deal but sadly, it’s nothing like the card game. Well, if you think about it, they can be pretty similar…

Back to the topic, what is the big hoo-haa about a monopoly? Governments frown at the rise of monopolistic firms but yet they attempt to monopolize certain industries such as utilities, media, freedom of speech, etc. (Some governments… I shan’t say who…)

The idea of being a monopoly owner is tempting. Imagine being the only supplier of a certain good, say the iPhone 10. A phone that can transform into a plane and fly you to HAWAII!! You’re the only person capable of producing such a phone. The demand for your iPhone 10 will be so overwhelming that you will find yourself increasing the price of this phone to a million dollars just to accommodate the demand which is limited by your own resources and time!

You have virtually unlimited market power in controlling the prices because nobody can compete with you for market share!

But what if this iPhone 10 can be produced for only $100? You’re charging $1,000,000???? What happens to the excess of $999,900? Yea obviously it goes into your pocket since you’re the successful entrepreneur but the government’s concern is whether this amount of money can be spread out evenly to the rest of the population. (Recall allocative efficiency)

Hopefully, that stimulates a little of thinking in you regarding why we are made to study this particular market structure. Don’t worry. I’m sure you’ll find it fun an easy to grasp! 🙂

At the end of the video, you should be able to:

  • Draw a price VS quantity graph illustrating the characteristics of a monopolistic firm.
  • Understand the concept of consumer/producer surplus and deadweight loss.
  • Identify supernormal, normal profits and losses on a monopolist graph.
  • Understand the concept of price discrimination and the strategic approach to a monopolist’s decision making process in such situations.

 

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Author: admin

14 Comments

  1. Drukarnia says:

    magnificent post, very informative. I wonder why the other experts of this sector do not notice this. You must continue your writing. I am confident, you have a huge readers’ base already!

  2. Thin says:

    Hi, can I know how do I show that firms produce at the elastic portion of their demand curve? And why? Thanks.

    • Quickienomics says:

      That’s because the formula for marginal revenue is given by MR=P.[1-1/n], where n is the price elasticity of demand. Assuming that demand is now inelastic which means that n is less than 1, we will end up with 1/n being a number that is larger than 1. If 1/n is larger than 1, 1 minus 1/n would give us a negative number. And since everything inside that bracket is negative, this would make MR negative, not very profit maximizing.

      But if demand were to be elastic, it would give us a positive MR.

      Hope that helps! 🙂

  3. Thin says:

    Yea. Thx. Got it now.

  4. KEKEKE says:

    THANK U!!!!!!!

  5. dave says:

    hi quickieguy, can i ask, at around 25:00 of the video, you mention that if price discriminate is allowed, then why is producing Xo at Po more profitable than X1 at P1?

    • Quickienomics says:

      Hi Dave!

      At 25:00, the situation was a case whereby price discrimination is not allowed. Therefore, the monopolist has to make a decision of whether to charge at p1 or p0 and sell to the respective demands. We determine the profitability by comparing the size of the area of gain and loss. However, since the graph is not drawn to scale, we have to state both cases. Hope that helps man!

  6. rev says:

    if unit tax or subsidy is an addition to mc …. is ac affected ?

  7. Jeremy says:

    Hey there, maybe there’s a difference between your lecture notes and mine but, according to my lecturer, dr zhang, he said that the Degree of Monopolistic power is controlled by P/MC not MC/P.
    is there a difference here??

    • Quickienomics says:

      Hi Jeremy,

      There is no major difference. If you’re using MC/P then monopolistic power increase as MC/P decreases. If you’re using P/MC then monopolistic power increases as P/MC increases. A firm is considered to have monopolistic power when the gap between P and MC widens; that is the key point to that note. Hope that helps, Jeremy.

  8. Leo says:

    Hi,

    Thanks so much for your videos, it has been immensely helpful.
    At 18.00, the brown part should be consumer surplus, not producer surplus.

    Great Work as always!

  9. abood says:

    YOU ARE THE BOSS DUDE!

    this is so well explained.
    thank you so much quikinomics, im procrastinating and yet im able to understand every single thing.
    i got my exams in 2 days. the problem with me is that LSE questions are really twisted and im freaking out.
    can you give me some tips?
    will be of great help!