Robert Whaples and the Modern Principles

A blog on my teaching with Modern Principles of Economics by Tyler Cowen and Alex Tabarrok

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Teaching Monopoly

Posted by Robert Whaples on October 6, 2009

Teaching Cowen and Tabarrok’s chapter on monopoly has required a little bit of gear shifting on my part.  My previous textbook defines a monopoly as a market with one seller, no close substitutes and barriers to entry.  C & T go with this broader (and perhaps more elegant) one-two punch: market power = the ability to raise price above average cost without fear that other firms will enter the market; and a monopoly is a firm with market power.  Their definition clearly covers more ground, implicitly allowing “monopolies” with multiple sellers, but both boil down to the same things — the existence of some kind of barrier to entry.

I especially like the footnote using calculus to show why the marginal revenue curve is twice as steep at the demand curve (in the linear case) and the discussion how elasticity of demand drives the ability to mark up price above costs.

However, I saw many puzzled looks when we began comparing price, quantity, consumer surplus, producer surplus and deadweight loss under monopoly versus competition.  My students wanted to know why we were assuming that the competitive supply curve was perfectly elastic — which is obviously a little off-putting after a month of drawing upward-sloping supply curves (despite the discussion at the end of the previous lecture about long-run supply curves in constant-cost competitive industries).  Perhaps the puzzlement was merely an opportunity, as I redrew Figure 11.5 of the text with an upward-sloping supply curve and worked out the slightly more complicated case (which seemed to reinforce the major points fairly effectively in less than five minutes).

Tomorrow I give a short quiz on monopoly and then I’ll find out what happens when you spend an entire intro lecture on price discrimination (something I’ve never done before).

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