Econ 10/2/07 Monopoly (chapter 12) Firms are price setters Firms maximize profit by producing at a level such that MR=MC but MR is no longer equal to Price. Economic profits need not to be zero even in the long run. o o o o M.R.= extra revenue you get when you sell one extra Condition to maximize profit MR=MC In case of perfect competition MR=P In case of perfect competition condition to maximize profit is I should produce output level such that P=MC
-Essential Difference between perfect competition and monopoly ~perfect competition = 1. Can sell extra unit without affecting market price MR=P 2. If I change a price higher than market price, then I lose my entire sale. ~monopoly = 1. In order to sell one more unit they have to lower the price. 2. If monopolist raises price, it will lose some customers, but not all of them. Power: -Monopoly 1. Firms ability to raise the price of a good without losing all its sales. 2. Key features of monopoly (market power) +no substitutes +barriers to entry (sources of market power) (a~c is legal barriers to entry, d is natural barrier to entry) a. Exclusive control over important inputs. b. Patents and copy right and licenses. c. Franchises d. Economic of scale (some industry must be run by one company)
-Economic of scale: firm doubles all factors of population. 1. My output level will be more than double. 2. Increasing revenue scale (economies of scale) then average of cost function is decreasing. Network economies: because everyone uses it I am going to use it as well.
Single price monopoly: profit maximization for the monopolist. Marginal Revenue: 1. In perfect competition MR=P 2. In monopoly MR<P