If a firm has the first mover’s advantage, they have a good chance of naturally establishing a monopoly. It becomes quite difficult for new people to enter the market.
Because a monopoly has market power, price would rise if they decide to produce less (as opposed to a competitive market where the price remains constant irrespective of quantity produced). The demand curve is downwards sloping.
A monopoly’s marginal revenue curve always lies below its demand curve.
For monopolies, the marginal revenue curve is far below the average revenue curve. Profit is maximized when the marginal cost is equal to the marginal revenue. For a monopolistic firm, the price exceeds the marginal cost.
Remember that all profit-maximizing curves try to equalize the marginal revenue and marginal cost. The monopoly profits as long as the price is greater than the average total cost.
Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs of production are the same.
To price discriminate, the firm must have market power. In perfect price discrimination, the monopolist knows the willingness to pay of each customer and charges each customer a different price.
It is not possible in a competitive market since the seller requires market power to enforce it.
Price discrimination increases profits for the monopolist.
Welfare economics studies how the allocation of resources affects economic wellbeing.
Equilibrium in the market ensures maximum welfare for both the consumers and the producer.
The willingness to pay is the maximum amount that a buyer will pay for a good. The consumer surplus is the buyer’s willingness to pay for a good minus the amount they actually pay for it. The area below the demand curve and above the price measures the consumer surplus.
The producer surplus measures the welfare of the seller.