| Chapter 4 Outline |
| II. MONOPOLY ANALYSIS |
| A. Demand |
| 1. Because the monopolist is a single seller, it faces the market demand curve for the product produced. |
| a. This demand curve is negatively sloped and shows that the monopolist can sell more output only by lowering the price of the product. |
| | 1. This means that the output the monopolist chooses to sell affects price. |
| B. Marginal Revenue |
| 1. Marginal revenue is the change in total revenue associated with selling one more unit of output. |
| a. It is the private benefit to the monopolist of selling one more unit. |
| 2. For a monopolist, marginal revenue is less than price. |
| a. Because the monopolist must lower the price on all units in order to sell
additional units, marginal revenue is less than price. |
| b. Because marginal revenue is less than price, the marginal revenue curve will lie below the demand curve. |
| | 1. Because demand represents marginal social benefit and marginal revenue represents marginal private benefit, marginal social benefit is greater than industry marginal private benefit in monopoly. |
| C. The Marginal Principle |
| 1. In choosing the output to produce, the monopolist follows the marginal
principle. |
| a. This principle states the profit maximizing output is that output where
marginal revenue equals marginal cost. |
| | 1. If marginal revenue is greater than marginal cost, the monopolist
should increase output. |
| | 2. If marginal revenue is less than marginal cost, the monopolist should decrease output. |
| D. Monopoly and Competition Compared |
| 1. Unlike a competitive industry, a monopoly does not produce the efficient output. Monopolists charge a higher price and produce less output than a competitive industry. |
| a. Efficient output occurs where marginal social cost and marginal social
benefit are equal. |
| b. Inefficiency occurs because of the divergence between marginal social benefit and marginal social cost. |
| | 1. At the output produced by the monopolist, marginal social benefit exceeds marginal social cost. |
| | a. The value to consumers of an additional unit exceeds the value
of the units of other goods given up to produce the additional unit - the opportunity cost. |