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Re-cap and remind

a) The demand curve for a monopolist is downward sloping because a steeper demand curve indicates a differentiation between products i.e. a more unique product whereas the perfectly elastic demand curve in a perfectly competitive market indicates that firms are price takers where they have no power over the price and are perfectly elastic to a price change and have perfect substitutes within their market.

b) The total revenue curve for a monopolist is upside down U-shaped because it is increasing at a decreasing rate, reaching a peak and then declining. A perfectly competitive firm’s total revenue curve is actually a straight line because the firm is a price taker in the market; it has no market control. The constant price is what makes the total revenue curve a straight line.

c) The marginal revenue curve for a monopoly is negatively sloped and lies below the demand curve. This is because a monopoly is a price maker and faces a negatively sloped demand curve. For a perfectly competitive firm, the marginal revenue curve is a horizontal, perfectly elastic line.

Economics everyday

Due to high barriers to entry, it is not possible for other firms to enter and compete with the monopolies. Because of this, a monopoly that is making economic profit in the short-run can continue to make economic profit in the long run because no new firms will enter the market.

Learning life lessons

a)

Monopolies charge more and produce less therefore decreasing Consumer surplus and increasing producer surplus, which decreases Total surplus resulting in a deadweight loss. Deadweight loss can be reduced if the firm practices price discrimination.

b) Because of the increase of substitutes for Foxtel, there is now a decrease in demand for Foxtel’s channels. Because of this decrease in demand, Foxtel will decrease their price from P* to P1. Foxtel’s profit has now decreased.