How can you know monopoly if you see one? Think back to the characteristics. There will be a single seller, someone who sells a product for which there are no closed substitutes, and there are significant barriers to entry, barriers that are so high in fact that no other producers can enter the industry. What kinds of barriers could there be that would keep competitors out? Patents would keep others out, at least until the patent expired, or unless you sell the right to use the idea to other people. Soul ownership of a key resource would prevent competition. For example, a fewer large bookstore that owns the only book distributor, then there's not really any way for other bookstores to get inventory. What about costs? Extremely high costs will keep many other producers out. In fact, in the case of extraordinarily high fixed costs, you can get a situation where economies of scale kick in, and you're actually better off to have only one producer. Look, think about power generation plants. It not only costs about a gazillion dollars to build the plant itself, but then you need the power grid, all those towers and lines to deliver the electricity. So if there's just one company incurring all those upfront costs, that firm can spread the costs out over a large quantity of production, and the cost per unit ends up being very low. But if you break this company up, creating 10 smaller firms that would compete with each other, each firm must repeat these initial costs, yet has only one tenth of the customers in this example, cost per unit ends up being very high. In a case like this, with huge economies of scale, it's actually more efficient to have only one producer as a natural outcome of the cost structure. This would be a natural monopoly. With a natural monopoly, the enormous fixed costs dominate, so that effectively the average total cost curves look like what we're accustomed to seeing in an average fixed cost curve, the more you produce, the lower the cost per unit. This type of monopoly is in the exception, though, and not the rule. Okay, enough about the atypical monopoly. What does the atypical monopoly look like? First of all, because the monopoly is the only seller of the product, anyone who wants to buy the product must buy from the monopoly. This means that the demand faced by the monopolist is the entire industry or market demand. What does marginal revenue look like? To figure that out, let's look at a basic demand schedule. As my prices drop, the quantity that I can sell rises. I need to calculate total revenue before I can calculate marginal revenue, which I do by multiplying the price per unit times the number of units. Then, I can address marginal revenue or the amount of additional revenue I generate by selling another unit. Since I had no revenue when my output was zero, the marginal revenue of my first unit is plus ten dollars. The second unit adds eight dollars to revenue, the third adds six dollars, and so on. Notice that, unlike perfect competition, the marginal revenue figures are less than the prices. If I plot out the numbers for demand and marginal revenue, you can see the contrast. I use the pricing quantity figures to plot demand and the marginal revenue and quantity figures to plot the marginal revenue curve. So I know that generally demand and marginal revenue look like this. To determine the monopolist chosen output, though, I need to be able to find the output at which marginal revenue equals marginal cost, so I also need to add a marginal cost curve. Because marginal cost looks the same no matter what the market structure is, all I need to do is add our usual J-shaped marginal cost curve to the existing diagram. Now, I can see the monopolist profit maximizing output, Q-star. Okay, this part is important. We don't know the monopolist's price yet. To find it, you have to remember that this producer can raise the price as high as the consumers are willing to pay. Since the demand reflects the buyer's willingness to pay, I go up to the demand curve to see what price I can get for these Q-star units of output. If Q-star is the monopolist profit maximizing output, MP-star is the price that can be charged for that output. What's the monopolist's profit? Well, we don't really know, do we? We're still missing the average cost curves, which need to be added in order to determine the amount of profit. Look, let's say you want to show monopolist who's earning a positive profit. This means that the price must be higher than the cost per unit. In this case, remember that price-time's quantity yields your total revenue in green, and average total cost-time's quantity gives your total cost in red. The remaining area that I have here in blue is the firm's profit. What happens to the monopolist's profit in the long run? I mean, if a competitive firm makes a profit in the short run, then over time, other firms enter and profits go to zero. So what happens to the monopolist's profit? Nothing happens. Remember the barriers to entry? Those barriers keep competitors out protecting the monopolist's profit. Does a monopolist necessarily earn profit? No, just because you're the only producer of something doesn't guarantee you'll earn a profit. If the cost per unit exceeds the price, you'll be losing money just like any other business owner. What'll happen in the long run? Any producer who's losing money in the short run will get out in the long run, taking his or her resources elsewhere. Where does this leave the industry? If this producer leaves, there is no industry. One last thing about monopoly. Why does so many people consider the monopolist to be the bad guy? This is just a producer trying to maximize profits like any other producer. Well, here's the thing. Most people are opposed to monopoly because they prefer the alternative competition. Look back at the monopolist. Now, if this were a competitive market, instead, remember that in a competitive market, the market supply and the market demand determine the pricing quantity. We know already that the monopoly faces the industry or market demand. Where's the industry supply? The marginal cost curve, as long as we're above that minimum average variable cost, is the monopoly supply. And since the monopolist is the only supplier, it's also the industry supply. The intersection of the industry supply and industry demand yield the price and quantity that we'd see if this were a perfectly competitive market. Why do people consider the monopolist to be the bad guy? Because the monopolist charges more and provides less product. The people who don't like the monopolist are the consumers who would rather see the lower prices in greater quantities associated with a competitive market. Next time, regulation.