Lecture 09 - ECO100 - ECO 100Y ECO 100Y troduction to...

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Unformatted text preview: ECO 100Y ECO 100Y troduction to troduction to Introduction to Introduction to conomics conomics Economics Economics Lecture 9: Lecture 9: Monopoly Monopoly © Gustavo Indart Slide 1 haracteristics of a Monopoly haracteristics of a Monopoly Characteristics of a Monopoly Characteristics of a Monopoly ¡ There is only one supplier of a commodity h dit h l b tit t ¡ The commodity has no close substitutes here is a barrier to the entry of new firms ¡ There is a barrier to the entry of new firms © Gustavo Indart Slide 2 arriers to Entry arriers to Entry Barriers to Entry Barriers to Entry ¡ Barriers to entry are legal or natural impediments rotecting a firm from competition from potential new protecting a firm from competition from potential new entrants ¡ egal barrier to entry Legal barrier to entry ¾ Public franchise ¾ Government licence ¾ Patent atural barriers to entry ¡ Natural barriers to entry ¾ Unique source of supply of a raw material conomies of scale © Gustavo Indart Slide 3 ¾ Economies of scale Single Single-Price Unregulated Price Unregulated Monopoly Monopoly ¡ Most monopolies are regulated by government ¾ We will examine the case of an unregulated monopoly ¾ This will show why governments regulate onopolies monopolies ¡ We will begin with the analysis of a single-price monopoly ¾ That is, a monopoly that charges the same price for ch and every unit of its output © Gustavo Indart Slide 4 each and every unit of its output Short Short-Run Cost Schedule Run Cost Schedule $ MC AC AVC Q We will assume that the cost schedule of a monopolist is similar to that of a mpetitive firm that is mainly that the © Gustavo Indart Slide 5 competitive firm, that is, mainly that the average total cost curve is U-shaped . Demand Curve Facing a Demand Curve Facing a Monopolist Monopolist P What distinguishes a monopoly firm m firm th t p r t nd r p rf t from a firm that operates under perfect competition is the firm’s demand curve. Since in a monopoly there is only one firm, the demand curve facing that firm is the industry demand curve. D © Gustavo Indart Slide 6 Q The Monopolist’s Revenue The Monopolist’s Revenue Functions Functions ¡ Total Revenue (TR): TR = P*Q verage Revenue R): Note that the market demand curve is the monopolist’s AR curve. ¡ Average Revenue (AR): TR P*Q AR = = = P Since the monopolist’s demand curve is downward sloping, price h h Q Q ¡ Marginal Revenue (MR): changes when output changes. ∆ TR ∆ (P*Q) P ∆ Q + Q ∆ P ∆ P MR = = = = P + Q © Gustavo Indart Slide 7 ∆ Q ∆ Q ∆ Q ∆ Q Effect on Revenue of an Increase Effect on Revenue of an Increase in Quantity in Quantity P As we move from point A to point B on the demand curve, TR decreases as a result of the decrease in P and increases as a...
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