4/10/2011 1 1 Monopoly Chapter 24 (Sections 1 to 5) Pure Monopoly A monopolized market has a single seller. The monopolist’s demand curve is the (downward sloping) market demand curve. So the monopolist can alter the market price by adjusting its output level. Pure Monopoly Output Level, y $/output unit p(y) Higher output y causes a lower market price, p(y). Why Monopolies? What causes monopolies? –a legal fiat; e.g. US Postal Service –a patent; e.g. a new drug –sole ownership of a resource; e.g. a toll highway –formation of a cartel; e.g. OPEC –large economies of scale; e.g. local utility companies. Pure Monopoly Suppose that the monopolist seeks to maximize its economic profit, What output level y* maximizes profit? ( )( )( ).yp y yc yProfit-Maximization ( )( )( ).yp y yc yAt the profit-maximizing output level y* dydyddyp y ydc ydy( )( )( )0so, for y = y*, ddyp y ydc ydy( )( ).
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