Google
Saturday 
December 7, 2024 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
COMMONWEALTH VERSUS HUNT: A notable court case, decided by the Massachusetts Supreme Court in 1842, that declared labor unions were not illegal, which had been the existing interpretation of the law up to that time. This court case paved the way for the U.S. labor union movement, which continued in force for the next 100 years. While this case established the legality of a labor union, union activities (such as strikes) were not necessarily legal. This was much like making it legal to own a gun, but not legal to shot someone.

Visit the GLOSS*arama


MONOPOLY, DEMAND:

The demand for the output produced by a monopoly is THE market demand for the good. In particular, if the market demand curve is negatively sloped (in accordance with the law of demand), then the demand curve for the output produced by a monopoly is also negatively sloped. The monopoly IS the market. The market demand IS the monopoly's demand. They are one and the same.
Monopoly is a market in which a single firm is the only supplier of the good. Anyone seeking to buy the good must buy from the monopoly seller. This single-seller status gives monopoly extensive market control; it is a price maker. The market demand for the good sold by a monopoly is the demand facing the monopoly.

Feet-First Pharmaceutical

A hypothetical example that can be used to illustrate the demand for a monopoly is Feet-First Pharmaceutical. This firm owns the patent to Amblathan-Plus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis. As the only producer of Amblathan-Plus, Feet-First Pharmaceutical is a monopoly with extensive market control. As such the market demand for Amblathan-Plus is also THE demand for Amblathan-Plus sold by Feet-First Pharmaceutical.

Demand and Revenue

Demand Curve,
Monopoly
Monopoly Demand
Single-seller status for Feet-First Pharmaceutical means that it faces a negatively-sloped demand curve, such as the one displayed in the exhibit to the right. The demand curve facing any monopoly is the market demand curve for the product.

The top curve in the exhibit is the demand curve (D) for Amblathan-Plus. This demand curve is also the average revenue curve for Amblathan-Plus. It shows the per unit revenue received by Feet-First Pharmaceutical for the sale of Amblathan-Plus. For reference purposes, the lower curve is the marginal revenue curve (MR). This curve displays the extra revenue received by Feet-First Pharmaceutical for each extra ounce of Amblathan-Plus sold.

Because a monopoly is a price maker with extensive market control, it faces a negatively-sloped demand curve. To sell a larger quantity of output, it must lower the price. For example, the Feet-First Pharmaceutical can sell 1 ounce of Amblathan-Plus for $10. However, if it wants to sell 2 ounces, then it must lower the price to $9.50. If it seeks to sell 3 ounces, then the price must be lowered to $9. Larger quantities are only sold it the price is less.

For this reason, the marginal revenue generated from selling extra output is less than price. While the price of the second ounce sold of Amblathan-Plus is $9.50, the marginal revenue generated by selling the second ounce is only $9. While the $9.50 price means the monopoly gains $9.50 from selling the second ounce, it loses $0.50 due to the lower price on the first ounce ($10 to $9.50). The net gain in revenue, that is marginal revenue, is thus only $9 (= $9.50 - $0.50).

By similar reasoning, the marginal revenue generated by the third ounce of Amblathan-Plus is only $8, even though the price is $9. On the plus side, Feet-First Pharmaceutical receives $9 from selling the third ounce. However, to sell the third ounce, it must lower the price on the first two ounces from $9.50 to $9. It loses $0.50 on each of these two ounces, or a total loss of $1. As such, the net gain in revenue, marginal revenue, is only $8 (= $9 - $1).

Compared to Perfect Competition

Demand,
Monopoly versus
Perfect Competition
Monopoly Demand

The demand facing monopoly can be compared with the demand facing a perfectly competitive firm. The demand curve for the output produced by a perfectly competitive firm is perfectly elastic, it is horizontal at the going market price. This is what makes a perfectly competitive firm a price taker. It must "take" whatever price is set in the overall market. Facing a downward-sloping demand curve, however, makes a monopoly a price maker. It has a great deal of control over the market and the market price. It IS the market!

Consider the market demand curve for the hypothetical Amblathan-Plus pharmaceutical foot treatment. This market demand curve indicates that if the market price is $4 per ounce, then Amblathan-Plus buyers are willing and able to purchase 2,000 ounces of medicine. If the price is $1 per ounce, then they are willing and able to purchase 8,000 ounces.

The first task is to compare this market demand curve for the demand curve facing Feet-First Pharmaceutical. To make this comparison, click the [Monopoly] button. Notice that NOTHING HAPPENS. It is the same curve. But of course! The market is the monopoly, the monopoly is the market.

The next task is a comparison with perfect competition. Suppose the market for Amblathan-Plus is transformed into a perfectly competitive market, with thousands of different firms selling Amblathan-Plus. How does the demand curve facing one of the perfectly competitive firms selling this medicine compare to the monopoly demand? Click the [Perfect Competition] button to illustrate. The resulting curve is horizontal, or perfectly elastic. Also note that the horizontal quantity scale measurement changes from thousands of ounces to mere ounces. Each of the perfectly competitive firms is now a price taker, and the price they take is $2.50 per ounce.

<= MONOPOLY, CHARACTERISTICSMONOPOLY, EFFICIENCY =>


Recommended Citation:

MONOPOLY, DEMAND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: December 7, 2024].


Check Out These Related Terms...

     | monopoly, sources | monopoly, efficiency | monopoly, realism | monopoly, problems | monopoly and perfect competition |


Or For A Little Background...

     | monopoly | monopoly characteristics | average revenue | marginal revenue | demand | demand curve |


And For Further Study...

     | monopoly, short-run production analysis | price discrimination | perfect competition | oligopoly | monopolistic competition | monopoly, marginal revenue and demand elasticity | barriers to entry | average revenue, monopoly | average revenue curve, monopoly | marginal revenue, monopoly | marginal revenue curve, monopoly |


Search Again?

Back to the WEB*pedia


APLS

RED AGGRESSERINE
[What's This?]

Today, you are likely to spend a great deal of time surfing the Internet hoping to buy either a handcrafted bird house or a weathervane with a chicken on top. Be on the lookout for celebrities who speak directly to you through your television.
Your Complete Scope

This isn't me! What am I?

Lombard Street is London's equivalent of New York's Wall Street.
"If you don't know where you are going, any road will get you there."

-- Lewis Carroll, writer

ASEAN
Association of South East Asian Nations
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2024 AmosWEB*LLC
Send comments or questions to: WebMaster