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AP Microeconomics – Monopoly

This lesson supports the Theory of the Firm section of the Advanced Placement Microeconomics curriculum. Students will learn in this lesson that the profit-maximization rules for the monopoly are the same as they are for a perfectly competitive firm but the monopoly will produce a smaller output than society would like it to produce.

This lesson appears as Lesson 5 from Unit 3: The Theory of the Firm in CEE's Advanced Placement Economics (4th Edition)

Introduction

This lesson extends the theory of the firm to the model of a monopoly. Students will see that the profit-maximization rules for the monopoly are the same as they were for a perfectly competitive
firm. Because price (P) is greater than marginal revenue for a monopoly, however, the output will
be smaller and the price higher than in a perfectly competitive market. It is in the monopoly’s best
interest to produce where MR = MC, not where P = MC. The monopoly will produce a smaller output than society would like it to produce. This results in the total welfare being smaller in a monopolistic market than in one that is perfectly competitive, thus creating a deadweight loss to society. 
 
Bell Ringer: Suppose a market that had many sellers of tee shirts changes so there is now only one seller of tee shirts. What do you think would happen to the price of tee shirts? What about the number of tee shirts sold?

Learning Objectives

  • Examine the demand, average revenue, marginal revenue, and total revenue functions of a monopoly.
  • Explain why price is higher than marginal revenue for a monopoly. 
  • Explain the rules a monopoly uses to maximize its total profit.
  • Draw graphs of a monopoly and identify its optimal output, price, and total profit.
  • Discuss the barriers to entry that keep out other firms.
  • Compare monopoly to perfect competition in terms of output, price, total profit, consumer surplus, producer surplus, and total welfare.
  • Explain why price discrimination will increase the total profit of a monopoly.
  • Discuss three pricing plans for the regulation of a natural monopoly.

Resource List

Process

Please refer to the Monopoly, Teacher Lesson.

Conclusion

Students complete Activity 3-15 from the Student Resource Manual, Comparing Perfect Competition and Monopoly.

Extension Activity

Not available for this lesson.

Assessment

Please refer to Monopoly, Student Resource Manual.