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Lecture_13_final

Lecture_13_final - Chapter 10 Market Power Monopoly and...

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1 Chapter 10 Market Power: Monopoly and Monopsony
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2 Last Time Competitive Markets: Flat Demand Curve for firms Firms set MC(q)=p Markets are efficient when p=MC: maximize CS+PS Thus, competitive markets are efficient
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3 Roadmap Monopoly: Firms have control over prices. Firms choose MR=MC, but MR is no longer equal to P! (because it is not perfectly competitive) Supply decision now depends on both demand curve for the firm and marginal costs
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4 Monopoly Characteristics of Monopoly: 1. One seller - many buyers 2. One product (no good substitutes) 3. Barriers to entry 4. Price setter
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5 Monopoly The monopolist is the supply-side of the market and has complete control over the amount offered for sale Monopolist controls price but must consider consumer demand Profits will be maximized at the level of output where marginal revenue equals marginal cost
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6 Average and Marginal Revenue Monopolist also needs to find marginal revenue , the change in revenue resulting from a unit change in output However, (unlike perfect competition) the firm’s marginal revenue is no longer equal to price! The more the firm sells, the lower the price it can command for its product
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7 Average and Marginal Revenue Finding Marginal Revenue Assume a monopolist with demand: P = 6 – Q Total Revenue R(Q) = P Q = (6 – Q) Q Marginal Revenue: Q Q Q Q Q R 2 6 ] ) 6 [( - = - =
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8 sold are that units all on falls Price unit extra an Sell )] ( [ ] ) ( [ Q Q P Q P Q Q Q P Q R + = = = Average Revenue AR=R/Q=(PQ)/Q=P Average and Marginal Revenue
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9 Total, Marginal, and Average Revenue
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10 Average and Marginal Revenue Output 1 2 3 4 5 6 7 0 1 2 3 $ per unit of output 4 5 6 7 Average Revenue (Demand) Marginal Revenue Technical Note: the MR is half the distance of the AR (Demand curve) on the horizontal for linear demand functions. See formula.
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11 Monopoly Observations 1. To increase sales the price must fall 2. MR < P 3. Compared to perfect competition No change in price to change sales MR = P
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12 Monopolist’s Output Decision 1. Profits maximized at the output level where MR = MC 2. Cost functions are the same MR MC or MR MC Q C Q R Q Q C Q R Q = - = = - = - = 0 / / / ) ( ) ( ) ( π π
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