Lecture 15 16 2.16.06student

Lecture 15 16 2.16.06student - Lectures 15 and 16 Monopoly...

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Lectures 15 and 16 Monopoly
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Key issues 1. monopoly profit maximization: MR = MC 2. market power 3. monopoly welfare effects: p > MC o DWL 4. cost advantages that create monopolies 5. government actions that create monopolies 6. government actions that reduce market power 7. dominant firm and competitive fringe
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Monopoly monopoly : only supplier of a good for which there is no close substitute monopoly's output is the market output: q = Q monopoly's demand curve is market demand curve its demand curve is downward sloping it doesn't lose all its sales if its raises its price it is a price setter
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Profit maximization
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Marginal revenue firm's MR curve depends on its demand curve monopoly's MR curve lies below its demand curve at any positive quantity because its demand curve is downward sloping demand curve shows price, p , it receives for selling a given quantity, Q price = p = average revenue
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Marginal revenue, MR
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Average and Marginal Revenue
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Average and Marginal Revenue
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Deriving monopoly’s MR curve
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Linear MR curve
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In our example
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MR and elasticity of demand MR at any given quantity depends on demand curve's height (price) demand curve's shape (elasticity) thus, it depends on its elasticity
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MR and price
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Choosing price or quantity monopoly can set p or Q to maximize its profit, K monopoly is constrained by market demand curve it cannot set both Q and p (cannot pick a point above demand curve) if monopoly sets p , demand curve determines Q if monopoly sets Q , demand curve determines p because monopoly wants to maximize K, it chooses same profit-maximizing solution whether it sets p or Q
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Profit maximization
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Maximizing Profit
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Monopoly optimum firm operates where MR = MC because MC is nonnegative, a monopoly never operates in the inelastic portion of the demand curve
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Market power ability of a firm to charge a price above marginal cost profitably
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“Of course, you could try another bank if there were any other banks.”
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Market power and shape of demand curve
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Lerner index (price markup)
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Causes of market power monopoly's demand curve is relatively inelastic if consumers are willing to pay "virtually anything" for it no close substitutes for firm's product exist other firms can't enter market other similar firms are located far away other firms’ products very different
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Lecture 15 16 2.16.06student - Lectures 15 and 16 Monopoly...

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