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CH_11-Micro - Full Length Text Part 5 Micro Only Text Part...

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To Accompany “Economics: Private and Public Choice 11th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: James Gwartney, David Macpherson, & Charles Skipton Full Length Text Micro Only Text Part: Part: Chapter: Chapter: Next page Copyright ©2006 Thomson Business and Economics. All rights reserved. 5 23 3 11
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. A few examples of factors that may serve as barriers to free entry into a market: economies of scale government licensing patents control over an essential resource
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Monopoly is a market with: high entry barriers, and, a single seller of a well-defined product for which there are no good substitutes. Only a few markets exist with a single seller, but they are nonetheless worth studying. The monopoly model helps us understand markets such as those for cable television and local phone service. Monopoly theory also enhances our understanding of markets with only a few sellers.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. As there is only one producer of a good or service in a market with a monopolist, the market demand curve is the monopolist’s demand curve . In order to maximize its profits, a monopolist will expand its output until marginal revenue just equals marginal cost . The monopolist will charge the price along the demand curve consistent with that level of output.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Price Quantity/time d P MR q MC ATC C B A and price P (along the demand curve) will be charged. • The monopolist will reduce price and expand output as long as MR > MC . MR > MC MR < MC • The monopolist will raise price and reduce output whenever MR < MC . • Output level q will result … • At output q the average total cost is C . • As P > C (price > ATC ) the firm is making economic profits equal to the area PABC . Economic profits
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. 0 ---- Total revenue = (1) (2) (3) Price (per unit) (2) Output ( per day) (1) 1 $25.00 2 3 4 5 6 7 8 9 10 ----- $50.00 Total costs ( per day) (4) Profit = (3) - (4) (5) Marginal cost (6) Marginal revenue (7) $24.00 $23.00 $22.00 $21.00 $19.75 $18.50 $17.25 $16.00 $14.75 $25.00 $48.00 $69.00 $88.00 $105.00 $118.50 $129.50 $138.00 $144.00 $147.50 $60.00 $69.00 $77.00 $84.00 $90.50 $96.75 $102.75 $108.50 $114.75 $121.25 -$35.00 -$21.00 -$8.00 $4.00 $14.50 $21.75 $26.75 $29.50 $29.25 $26.25 -$50.00 ---- $10.00 $25.00 $9.00 $23.00 $8.00 $21.00 $7.00 $19.00 $6.50 $17.00 $6.25 $13.50 $6.00 $11.00 $5.75 $8.50 $6.25 $6.00 $6.50 $3.50 ---- < < < < < < < < Maximum profits A monopolist will reduce price and expand output as long as MR > MC .
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