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Intermediate Microeconomics


8. Monopoly


A monopoly is the sole seller of a good that does not have close substities. As a result, the demand curve facing a monopolist is the market demand curve, which is downward sloping. Thus, the monopoly is able to set its price. A monopolist charges a price that exceeds their marginal cost, which differs from a firm in a competitive market. The higher price charged results in a reduction in trades between buyers and sellers that would, under perfect competition, be desirable for both parties. In the Screencasts/Pencasts for this topic, particular aspects of monopolistic markets are covered, including profit maximization, market power, how the extent of market power depends on the elasticity of demand, how taxes affect outcomes in markets controlled by a monopoly, the welfare effects of monopolies, natural monopolies, and policies designed to combat the harm caused by monopoly power.


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Basics of Monopoly

This Screencast discusses monopolistic firms, why monopolies arise, the ability of a monopoly to set prices, and the welfare consequences of monopoly power. [Play ScreenCast]


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Profit Maximization

This Pencast presents the monopoly’s profit function and the necessary and sufficient conditions for profit maximization. [Play Pencast]


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Marginal Revenue

This Pencast shows how to derive a function for a monopoly’s marginal revenue curve. An applied example is provided. [Play Pencast]


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Marginal Revenue and Elasticity

This Pencast illustrates that a monopoly’s marginal revenue function depends on the elasticity of demand. An applied example shows that a monopoly always sets its price on the elastic portion of a linear demand curve. [Play Pencast]


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Applied Example of Profit Maximization

This Pencast provides an applied problem to illustrate how a monopoly firm chooses its output, sets its price and calculates its profit. [Play Pencast]


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Graph of Profit Maximization

This Pencast shows how to graph the demand, marginal revenue, marginal cost, average variable cost, and marginal cost curves using the explicit functions from the previous Pencast. [Play Pencast]


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Market Power

This Pencast illustrates that a monopoly’s market power, i.e. its ability to charge a price above marginal cost, depends solely on the elasticity of demand. It is shown, using the monopoly price and marginal cost from previous Pencasts, how to compute the elasticity of demand and the monopoly equilibrium. [Play Pencast]


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Lerner Index

This Pencast illustrates how to derived the Lerner Index, a measure of the market power. [Play Pencast]


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Learner Index: Interpretation and Application

This Pencast provides the intuition behind the Lerner Index and an application of it. [Play Pencast]


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Monopoly and Welfare

This Pencast uses the tool of welfare accounting to demonstrate the inefficiency caused by monopolists. [Play Pencast]


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Effects of a Per-Unit Tax

This Pencast illustrates how a per-unit tax imposed on a monopolist affects the quantity sold and the price charged. [Play Pencast]


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Effects of a Per-Unit Tax: A Numerical Example

This Pencast uses explicit form functions to how a per-unit tax affects the quantity sold and the price charged. [Play Pencast]


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Tax Incidence

This Pencast uses a constant elasticity demand curve to show that a per-unit tax imposed on a monopoly can result in an increase in price that exceeds the size of the tax. [Play Pencast]


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Natural Monopoly: Basics and Cost Curves

This Pencast provides an illustration of a hypothetical natural monopoly's cost curves. [Play Pencast]


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Natural Monopoly: Competition Increases Costs

This Pencast shows how introducing competition into a market controlled by a natural monopoly increases the costs of production. [Play Pencast]


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Price Regulation: Traditional Monopolies

This Pencast illustrates graphically how optimal price regulation affects the market outcome. [Play Pencast]


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Price Regulation: Natural Monopolies

This Pencast illustrates graphically how optimal price regulation affects the market outcome. Problems arise due to the nature of the natural monopoly’s costs, which make imposing marginal-cost pricing difficult. [Play Pencast]


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