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Week 11 · Lecture outline

Week 11 — Lecture Outline · Monopoly

Principles of Microeconomics · ECON 1 Fall 2026 · Prof. Kessler Fictional sample

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objective 6 — Perfect competition & monopoly (P = MC, MR = MC, shutdown, market power) · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ~150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified.

Week at a glance
Big question When a single seller controls a market, how does it decide what to charge and how much to produce — and what does society lose?
By week's end students can (1) explain why MR < P for a monopolist and derive MR from linear demand; (2) set MR = MC to find Qm, then read Pm off demand (NOT MR); (3) compute deadweight loss vs. the competitive benchmark; (4) explain price discrimination; (5) evaluate market power and antitrust fairly.
Key vocabulary market power, price maker, marginal revenue (MR), MR curve, MR = MC rule, monopoly equilibrium (Qm, Pm), deadweight loss (DWL), competitive benchmark, price discrimination, barriers to entry, natural monopoly
Materials whiteboard; Week-11 readings/links; Desmos for the MR/demand graph; approved chatbot
Timing note 8 segments ≈ 150 min across two sessions.

Segment 1 — HOOK: "One seller, whole market" (10 min)

Open with a quick contrast: last week's competitive firm was a price taker — it could sell everything it wants at the going market price; raising its price by a cent loses all customers. Today's firm is a price maker — it is the market, so it faces the downward-sloping demand curve directly. Every extra unit it sells requires lowering the price on every unit sold.

Motivating examples: a local cable company with no competitors, a pharmaceutical company holding a patent on a breakthrough drug, a utility with exclusive service territory. What do they all share? No close substitutes + barriers to entry. That combination is the definition of monopoly.

Segment 2 — PLAIN-LANGUAGE IDEA: Why MR < P (20 min)

For a competitive firm, selling one more unit adds exactly P to revenue (price taker). For a monopolist, selling one more unit requires cutting the price on all previous units too — so the extra revenue is less than the new price.

Intuition with a 3-unit example (describe on board):

Demand: P = 100 − 2Q. Suppose the monopolist raises output from 2 to 3 units.
- At Q = 2: P = 100 − 2(2) = 96; TR = 96 × 2 = 192.
- At Q = 3: P = 100 − 2(3) = 94; TR = 94 × 3 = 282.
- MR at the 3rd unit = 282 − 192 = 90.
- But P at Q = 3 is 94. So MR (90) < P (94). ✓

The monopolist gains revenue from the new unit (P = 94) but loses revenue on the 2 existing units because it had to cut the price by $2 each: loss = 2 × $2 = $4. Net: 94 − 4 = 90 = MR. This is the MR < P rule in arithmetic.

The MR formula for linear demand: if demand is P = a − bQ, then MR = a − 2bQ — same intercept, twice the slope. So for P = 100 − 2Q, MR = 100 − 4Q. The MR curve is always below the demand curve for a downward-sloping demand.

Segment 3 — WORKED EXAMPLE: Finding Qm and Pm (25 min)

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

Demand: P = 100 − 2Q → MR = 100 − 4Q; constant MC = 20.

Step 1 — Set MR = MC:
100 − 4Q = 20 → 4Q = 80 → Qm = 20

Step 2 — Read Pm off DEMAND (NOT MR):
Pm = 100 − 2(20) = 100 − 40 = Pm = 60

#1 TRAP: If a student plugs Qm = 20 into the MR formula: MR = 100 − 4(20) = 20. That is MC, not price! The MR = MC condition is satisfied when MR equals 20, which is how we found Q. But the price the monopolist charges comes from the demand curve. NEVER read price off MR.

Competitive benchmark (P = MC): 100 − 2Q = 20 → Q = 40; P = 20. So Qc = 40, Pc = 20.

Monopoly vs. competitive: Q falls from 40 to 20; P rises from 20 to 60. Society loses the trades that would have happened between Q = 20 and Q = 40.

Deadweight loss = ½ · (Qc − Qm) · (Pm − Pc)
= ½ · (40 − 20) · (60 − 20) = ½ · 20 · 40 = DWL = 400

Monopoly profit (given ATC = MC = 20):
= (Pm − ATC) · Qm = (60 − 20) · 20 = profit = 800

Walk through every step on the board. Draw the graph with: the demand line (P = 100 − 2Q), the MR line (100 − 4Q, same intercept, twice the slope), the horizontal MC line at 20. Mark Qm = 20 on the x-axis, draw a vertical to the MR curve (it hits at 20 = MC ✓), then continue the vertical up to the DEMAND curve at Pm = 60. The deadweight loss triangle sits between Qm and Qc, bounded above by demand and below by MC.

Segment 4 — PRICE DISCRIMINATION (18 min)

A monopolist that can separate buyers by willingness to pay can charge different prices to different groups. Three degrees:

  • First-degree (perfect): charge every buyer exactly their WTP. All consumer surplus captured as profit; DWL = 0. Theoretically efficient but requires perfect information.
  • Second-degree (block pricing / quantity discounts): price depends on quantity purchased. Examples: utility tiered rates, airline ticket classes.
  • Third-degree (market segmentation): different prices to identifiable groups (students, seniors, time-of-day). Condition: must be able to prevent resale.

Effect on output: price discrimination tends to increase output relative to single-price monopoly — and in the extreme (first-degree) restores the competitive quantity. Controversial normatively: is it fair to charge less to students? That depends on your values — the economics is positive (what happens to Q, P, CS, PS).

Segment 5 — BARRIERS TO ENTRY & MARKET POWER (15 min)

Why can a monopolist persist? If a firm earns positive economic profits, recall from last week that in perfect competition those profits attract entry, which competes them away. A monopoly survives because of barriers to entry:

  • Legal barriers: patents and copyrights (a deliberate government grant of temporary monopoly to reward innovation); government licensing (utilities, cable); exclusive franchises.
  • Natural monopoly: economies of scale so large that one firm can serve the market at lower cost than two. Classic cases: electricity transmission, water systems.
  • Control of key resources: exclusive ownership of a critical input.
  • Network effects: the good becomes more valuable as more people use it (social media, operating systems) — the incumbent is hard to displace.

Discuss the normative question carefully: we intentionally grant patent monopoly to create innovation incentives, accepting DWL as the trade-off. Is that good policy? That's a values question; the economics models the trade-off but doesn't resolve it.

Segment 6 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (15 min)

Live demo (Desmos): plot the demand P = 100 − 2Q as y = 100 − 2x, the MR as y = 100 − 4x, and the MC as y = 20. Mark the intersection of MR and MC at (20, 20). Then draw a vertical to the demand line at x = 20 to reach Pm = 60. Shade the deadweight loss triangle.

AI-critique moment: Ask a chatbot: "For a monopolist facing demand P = 100 − 2Q and constant MC = 20, what is the profit-maximizing quantity and price?" Then audit it:
- Did it correctly derive MR = 100 − 4Q?
- Did it solve Qm = 20 from MR = MC?
- The critical test: did it read Pm = 60 off the DEMAND curve? Or did it mistakenly say P = 20 (reading off MR)? Chatbots make the P-off-MR mistake frequently.
- Did it correctly compute DWL = 400?

Make the class catch any error and explain the correct step.

Segment 7 — INTERACTION: the antitrust debate (12 min)

Quick think-pair-share: "Amazon, Google, Meta — are large tech firms monopolies that harm consumers, or efficient platforms that make consumers' lives better? What evidence would you want to see?"

Target: push students toward the positive/normative distinction. Positive: what do the models predict about DWL, price, and innovation? Normative: how much DWL is acceptable, and who bears the burden of antitrust action? Present both the "bigness is bad" view and the "efficient platforms" view evenhandedly.

Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (10 min)

  • Callback: MR < P because the monopolist must cut price to sell more; the MR = MC rule finds the optimal Q; you read price off DEMAND, not MR. The DWL (400 in our example) is real lost value.
  • Tease next week: "Two more imperfect market structures — monopolistic competition (many sellers but differentiated products) and oligopoly (a few interdependent rivals) — plus the prisoner's dilemma, which explains why cartels keep breaking down."
  • The week's work: Tutorial (MR, MR = MC, DWL), Practice (6 reps), Quiz 11, Discussion 11, Assignment 11, and Workshop 11 (derive MR → find Qm and Pm → compute DWL; Desmos).

Instructor FAQ — common stumbles

  • "Why is MR < P?" Because the monopolist must lower the price on all previous units to sell one more. MR = P only for a price-taker (perfect competition) where the demand it faces is horizontal.
  • "How do I find the MR curve?" For P = a − bQ, MR = a − 2bQ: same intercept, twice the slope.
  • "Why do I look up to demand for the price?" The MR = MC condition tells you how much to produce, but buyers on the demand curve tell you what they'll pay for that quantity. MR is an internal calculation; demand is the market's offer.
  • "Is the DWL always a triangle?" With linear demand and constant MC, yes — ½ · base · height. With more complex curves it may differ.
  • "Is monopoly always bad?" Not necessarily — a natural monopoly may lower costs; patents incentivize R&D. The DWL is a cost; the innovation benefit may outweigh it. That's the normative debate.
  • "What's first-degree price discrimination?" Charging every buyer exactly their willingness to pay — capturing all consumer surplus. Output = competitive level; DWL = 0. Rarely observed in practice because perfect information is required.

~ Prof. Kessler's edition · Fall 2026 · built with thecoursemaker.com