The profit-maximizing solution for the monopolist is found by locating the biggest difference between total revenues (TR) and total costs (TC), as in Equation 3.1. In Figure 3.1, an agricultural chemical firm faces an inverse demand curve equal to: P = 100 – Q d, where P is the price of the agricultural chemical in dollars per ounce (USD/oz), and Q d is the quantity demanded of the chemical in million ounces (m oz). The patent is a legal restriction that permits the patent holder to be the only seller of the herbicide, as it was invented by the company through their research program. For example, suppose that an agricultural chemical firm has a patent for an agricultural chemical used to kill weeds, a herbicide. However, the monopolist is constrained by consumer willingness and ability to purchase the good, also called demand. Price Maker = A noncompetitive firm with market power, defined as the ability to set the price of a good.Ī monopolist is considered to be a price maker, and can set the price of the product that it sells. Price Taker = A competitive firm with no ability to set the price of a good. On the other hand, firms with market power are also called “price makers.” Each competitive firm is small relative to the market, so has no influence on price. A competitive firm is a “price taker.” Thus, a competitive firm has no ability to change the price of a good. Market power is also called monopoly power. McDonalds is the only provider of Big Macs, yet it is not a monopoly because there are many close substitutes available: Burger King Whoppers, for example. The phrase, “no close substitutes” is important, since there are many firms that are the sole producer of a good. Monopoly = A single firm in an industry with no close substitutes. An industry is defined as a group of firms that produce the same good. Also called monopoly power.Ī monopoly is defined as a single firm in an industry with no close substitutes. Market Power = Ability of a firm to set the price of a good. This chapter will explore firms that have market power, or the ability to set the price of the good that they produce.
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