# monopoly1.ppt - Monopoly No discrimination Econ 171 1...

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Econ 171 1 Monopoly: No discrimination

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Econ 171 2 Marginal Revenue The only firm in the market market demand is the firm’s demand output decisions affect market clearing price \$/unit Quantity Demand P 1 Q 1 P 2 Q 2 L G
Econ 171 3 Monopoly (cont.) Derivation of the monopolist’s marginal revenue Demand: P = A - B.Q Total Revenue: TR = P.Q = A.Q - B.Q 2 Marginal Revenue: MR = dTR/dQ MR = A - 2B.Q With linear demand the marginal revenue curve is also linear with the same price intercept but twice the slope of the demand curve \$/unit Quantity Demand MR A

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Econ 171 4 Monopoly and Profit Maximization The monopolist maximizes profit by equating marginal revenue with marginal cost \$/unit Quantity Demand MR AC MC Q M P M AC M Q C Profit
Econ 171 Marginal Revenue and Demand Elasticity MC p d 1 1 d p p q q P p q q P p q R q q P q R q P 1 1 / 1 / ' : revenue Marginal revenue Total ) ( : demand Inverse Max profits: MR = MC higher elasticity lower price Lerner Index: d p MC p L 1

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Econ 171 6 Deadweight loss of Monopoly Demand Competitive Supply Q C P C \$/unit MR Quantity Assume that the industry is monopolized The monopolist sets MR = MC to give output Q M The market clearing price is P M Q M P M Consumer surplus is given by this area And producer surplus is given by this area The monopolist produces less surplus than the competitive industry. There are mutually beneficial trades that do not take place: between Q M and Q C This is the deadweight loss of monopoly This is the deadweight loss of monopoly
Econ 171 7 Deadweight loss of Monopoly (cont.) Why can the monopolist not appropriate the deadweight loss? Increasing output requires a reduction in price this assumes that the same price is charged to everyone. The monopolist creates surplus some goes to consumers some appears as profit The monopolist bases her decisions purely on the surplus she gets, not on consumer surplus The monopolist undersupplies relative to the competitive outcome The primary problem: the monopolist is large relative to the market

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Econ 171 8 Price Discrimination and Monopoly: Linear Pricing
Econ 171 9 Introduction Prescription drugs are cheaper in Canada than the United States Textbooks are generally cheaper in Britain than the United States Examples of price discrimination presumably profitable should affect market efficiency: not necessarily adversely is price discrimination necessarily bad – even if not seen as “fair”?

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Econ 171 10 Feasibility of price discrimination Two problems confront a firm wishing to price discriminate identification : the firm is able to identify demands of different types
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