Module 27 krugman 1
Module 27
Monopoly in Practice
What’s New in the Fourth Edition?
Module Objectives
• What is the significance of monopoly, a type of industry in which only one producer, a monopolist,
operates?
• How does being a monopolist affect a firm’s price and output decisions?
Teaching Tips
The Monopolist’s Demand Curve and Marginal Revenue
Creating Student Interest
• Draw a downward-sloping demand curve on the board. Ask students if this is a market or a firm
demand curve. Students should remember that the market and firm demand curves were different in
perfect competition. You will probably get a difference of opinion, with students calling out both
“market” and “firm” as the answer. If you wait quietly for a little bit, you will likely see the class
come to a consensus, figuring out that it is both. Since the monopoly is the only firm, it has the entire
market demand.
Presenting the Material
• Ask students to consider how a monopolist, who faces the market demand curve for their product,
increases the quantity that they sell. Remind them of the downward sloping demand curve. They
should respond that they must lower price. Ask if they can lower price only on the marginal (the
next) unit they sell, or if they must lower it on all they sell. Of course, students may see that lowering
The Monopolist’s Profit Maximizing Output and Price
Creating Student Interest
• Ask students to recall the profit-maximizing rule for a perfectly competitive firm (MC = MR). Then
ask them the profit-maximizing rule for a monopolistic firm (MC = MR). Emphasize that profit
maximization occurs at MC = MR any time, any industry, any market structure.
Presenting the Material
• Remind students of the actual shape of the marginal cost curve. Draw the profit maximizing graph
with a marginal cost curve with the traditional shape and note the profit.
• Use Handout 27-1 to show profit maximization occurs where MC = MR.
Monopoly versus Perfect Competition
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Creating Student Interest
• Remind students that antitrust laws in the United States were designed to prevent the formation of
monopoly. Ask students why the government would want to prevent monopolies? By now they
should say because the monopolist will produce less and charge a higher price. Now ask them if that
Presenting the Material
• Ask students whether monopoly or perfect competition will make a greater profit. Remind students
that perfect competition will not make a profit in the long run, but
Module Outline
I. The monopolist’s demand curve and marginal revenue
A. The demand curve for a monopolist is downward sloping, whereas the demand curve for a
perfectly competitive firm is horizontal.
B. For a monopolist, the demand curve is the market demand curve.
C. The additional revenue a monopolist earns from increasing output by one unit is less than the
price at which the unit is sold.
D. For a monopolist, an increase in production has two opposing effects on revenue.
1. The quantity effect: As one more unit is sold, it increases total revenue by the price at
which the unit is sold.
2. The price effect: In order to sell the last unit, the monopolist must cut the price on all units
sold.
3. At low levels of output, the quantity effect is larger than the price effect; at higher output
levels, the price effect is stronger than the quantity effect.
E. For a firm with market power, the marginal revenue curve always lies below its demand curve.
This is illustrated in text Figure 27-2, shown here.
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Figure 27-2
II. The monopolist’s profit-maximizing output and price
A. A monopolist maximizes profit at an output level where MR = MC.
B. The price a monopolist charges is what consumers are willing to pay for that output level. This
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Figure 27-3
III. Monopoly versus perfect competition
A. For a perfectly competitive firm, P = MC at the profit-maximizing quantity of output.
B. P > MR = MC for a monopolist at the profit-maximizing quantity of output.
IV. Monopoly: The general picture
A. Generally, a monopolist will have an upward-sloping marginal cost curve.
C. Monopolies can earn profits in the short run and the long run. The monopolist’s profit is
illustrated in text Figure 27-4, shown here.
Figure 27-4
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Case Studies in the Text
Economics in Action
Shocked by the High Price of Electricity—This EIA discusses deregulation in the distribution and
generation of electricity.
Ask students the following questions:
1. Why was there a move toward deregulation of electric utilities in the 1990s? (It was
2. Why is there a move toward reregulation of electric utilities? (The generation of power
Web Resources
Module 27 krugman 6
Handout 27-1
Date_________ Name____________________________ Class________ Professor________________
Monopoly Profit Maximization
(1)
Quantity of
diamonds
(2)
Price of
diamonds
(3)
Total
revenue
(4)
Marginal
revenue
(6)
Marginal
cost
(7)
Profit
0
$200
1
180
2
160
3
140
4
120
5
100
1. Which two columns depict the demand for this monopolist?
2. Calculate Total Revenue, Marginal Revenue, and Marginal Cost for this firm.
3. What quantity of output will yield maximum profits for this firm? At what price must they sell?
4. Calculate the profits at each possible level of output for the firm. Does this profit confirm the
profit maximizing price and quantity in 3?
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Answers
(1)
Quantity of
diamonds
(2)
Price of
diamonds
(3)
Total
revenue
(4)
Marginal
revenue
(5)
Total cost
(6)
Marginal
cost
(7)
Profit
1. Which two columns depict the demand for this monopolist?
2. Calculate Total Revenue, Marginal Revenue, and Marginal Cost for this firm.
See table.
3. What quantity of output will yield maximum profits for this firm? At what price must they sell?
4. Calculate the profits at each possible level of output for the firm. Does this profit confirm the
profit maximizing price and quantity in 3?