29. Monopoly Basics

In this video, I demonstrate (1) Why marginal revenue for a monopolist is below the inverse demand curve, (2) how a monopolist selects its optimal quantity, (3) how to compute the monopoly price, (4) how to compute monopoly profit, and (5) how to illustrate all of these concepts on a graph with cost curves and the demand curve.

After demonstrating the concepts, I use an example to show how these pieces fit together in practice.

For a list of videos and links to these videos (organized by topic), check out the Intromediate Microeconomics video web page:

http://blog.thisyoungeconomist.com/p/learn-microeconomics.html

Category:

Education

Tags:

• monopoly
• cost curves
• monopolist's tradeoff
• firms
• producer behavior
• marginal revenue
• monopoly pricing
• monopoly profit
• graphical economics
• economics lectures
• intromediate microeconomics
• microeconomics

[KLguy133]

Do the graphs relate to the firm rather than the industry and shouldn't the Demand curve be a lot steeper since it would be pretty price inelastic ?

[intromediateecon]

@KLguy133 A monopoly relates to both a firm and an industry because it is one firm that has no competition in the industry.

[intromediateecon]

@KLguy133 "Steeper" is a relative concept. If I only draw one demand curve on the graph, all that matters from a conceptual standpoint is that it slopes downward. Even if a monopoly faced relatively more inelastic demand than a competitive firm, it wouldn't matter for this graph because (at least in this simple setting) the monopoly doesn't get to choose between being a monopoly and being a competitive firm.

Your question is deeper than it first appears. I may expound on it in another video.

[LiLGx1]

How did you calculate AC?

[intromediateecon]

@LiLGx1 In this video, the AC is given (I just drew one with the usual shape in at 4:46 and for the example at 5:19, the AC was just given). In general, you compute average cost by dividing total cost by quantity.

[TheBiggestOne111]

hi, everything is perfect, but I did not understand why at 5:45 the MR = 10 - 2Q. why 2 time Q? 2 is something random number or what?

mecri

[InfernoDragonHeart]

This is beautiful! Thank You!

[acul100]

@APviKINGsz28 To be fair, he ain't no Pajholden

[acul100]

Pajholden has a monopoly on youtube economics video's

[intromediateecon]

@fjorgploog It is a rule of thumb, but if you want to know the math (and you know a *little* calculus), I have a video on that. Video 29a.

[fjorgploog]

@Cytoskeleton1 I wonder that as well. But I think as a rule of thumb, MR is always twice as steep as the Demand curve.

[Cytoskeleton1]

How did he find MR? Can anybody explain?

[KLguy133]

@intromediateecon Yeah it is and that's cause I am a mature guy in my late 30's going back to college. But yes, I think perhaps the fact that a monopoly usually has a steeper D curve but not always is the key here.

So it depends on what kind of industry it is - the D curve should vary in steepness according to how price inelastic its product is, notwithstanding that it is a monopoly.

[KLguy133]

@intromediateecon Then isn't it more realistic to draw the D curve be a lot steeper since monopolies usually, though not always have pretty price inelastic Demand.