LEARNING OBJECTIVES:By the end of this chapter, students should understand:why some markets have only one seller.how a monopoly determines the quantity to produce and the price to charge.how the monopoly’s decisions affect economic well-being.the various public policies aimed at solving the problem of monopoly.why monopolies try to charge different prices to different customers.CONTEXT AND PURPOSE:Chapter 15 is the third chapter in a five-chapter sequence dealing with firm behavior and theorganization of industry. Chapter 13 developed the cost curves on which firm behavior is based. These cost curves were employed in Chapter 14 to show how a competitive firm responds to changes in market conditions. In Chapter 15, these cost curves are again employed, this time to show how a monopolistic firm chooses the quantity to produce and the price to charge. Chapters 16 and 17 will address the decisions made by oligopolistic and monopolistically competitive firms.A monopolist is the sole seller of a product without close substitutes. As such, it has market power because it can influence the price of its output. That is, a monopolist is a pricemaker as opposed to a price taker. The purpose of Chapter 15 is to examine the production and pricing decisions of monopolists, the social implications of their market power, and the ways in which governments might respond to the problems caused by monopolists.KEY POINTS:1.A monopoly is a firm that is the sole seller in its market. A monopoly arises when a singlefirm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could.289MONOPOLY15
290 Chapter 15/Monopoly2.Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by one unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly’s marginal revenue is always below the price of its good.3.Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. The monopoly then chooses the price at which that quantity is demanded. Unlike a competitive firm, a monopoly firm’s price exceeds its marginal revenue, so its price exceeds marginal cost.4.A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. That is, when the monopoly charges a price above marginal cost, some consumers who value the good more than its cost of production do not buy it. As a result, monopoly causes deadweight losses similar to the deadweight losses caused by taxes.