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AP Economics

This module introduces the core differences between monopoly and perfect competition within the framework of AP Economics. It explains how a monopolist maximizes profit where marginal revenue equals marginal cost (MR=MC), the significance of price-setting, and the barriers to entry that monopolists face. Additionally, it contrasts these concepts with perfectly competitive firms, highlighting their price-taking behavior, free entry and exit, and long-term profit implications. Key graphs illustrate the monopolist's decision-making process and the inefficiencies created by monopolistic practices.

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AP Economics

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  1. AP Economics Mr. Bernstein Module 61: Introduction to Monopoly November 25, 2013

  2. AP EconomicsMr. Bernstein Monopoly vs. Perfect Competition • Monopolist maximizes profit where MR=MC • Perfectly Competitive firm also maximizes profit where MR=MC • Monopolist sets price • Perfectly Competitive firm is a price taker • Monopolist has barriers to entry • Perfectly Competitive firms have free entry and exit • Monopolist has opportunity to earn profits in long run • Perfectly Competitive firm will earn zero profit in long run

  3. AP EconomicsMr. Bernstein Monopoly Demand and MR • Monopolist MR curve is below D curve because they must reduce price to sell more • Unlike perfect competition, DFIRM = DINDUSTRY

  4. AP EconomicsMr. Bernstein Monopoly Profit-Maximizing P and Q • As with perfect competition, p is maximized where MR=MC • Optimal Output Rule – Know the Concept, own the Concept!

  5. $ Profit = $12 Pm= $14 MC = ATC Pc = $10 D MR Qm= 3 Output AP EconomicsMr. Bernstein Monopoly Profit-Maximizing P and Q • Monopolies create inefficiencies; P>MC • Also notice Qm is lower than Qc would be (where D and MC Intersect)

  6. $ Profit = $12 Pm= $14 MC = ATC Pc = $10 D MR Qm= 3 Output AP EconomicsMr. Bernstein Monopoly Profit-Maximizing P and Q • With barriers to entry there are no new entrants and no adjustment to new equilibrium with zero economic profits at long-run equilibrium

  7. AP EconomicsMr. Bernstein Classic Monopoly Graph • Qm is found where MR=MC • But Pm is found by extending Qm vertically to D curve • Be sure you can find Monopolist’s p area

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