Chapter 15

The previous chapter had focused on the aspects of firms in perfectly competitive markets. In Chapter 15, the focus shifts onto the aspects of monopolies. Monopolies are the sole seller in markets as well as the price makers. As there are no close substitutes, the company can charge what they want. However, monopolies do face some barriers, those being government regulation, production process, and monopoly resources. For example, De Beers used to have a monopoly on diamonds as they controlled nearly all of the diamond mines. Thus, they could set the price to what they desired. Natural monopolies occur when one company can produce the same amount of output for less input. In monopolistic markets, in order to support an increase in production, the price must be lowered. When marginal revenue is greater than marginal cost, increase production. However, when marginal revenue is less than marginal cost, decrease production. Profits are maximized when marginal revenue is equal to marginal cost. In competitive firms price is equal to marginal revenue which is equal to marginal cost. However, in monopolies, price is greater than marginal revenue, and marginal revenue is equal to marginal cost. A monopoly's profit is calculated by taking the area in between demand and average total cost, extending to the length of quantity. Deadweight can occur as well. Socially efficient quantity is seen where the demand curve and marginal cost intersect with each other. Price discrimination is the business practice of selling the same good at different prices to different customers.