Ch 10 Market power

# Ch 10 Market power - 10 MARKET POWER Econ 100A Mortimer...

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MARKET POWER 10 Econ 100A Mortimer

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monopoly Market with only one seller. monopsony Market with only one buyer. market power Ability of a seller or buyer to affect the price of a good. Market Power: Monopoly and Monopsony Econ 100A Mortimer
MONOPOLY Average Revenue and Marginal Revenue marginal revenue Change in revenue resulting from a one-unit increase in output. TABLE 10.1 Total, Marginal, and Average Revenue Total Marginal Average Price (P) Quantity (Q) Revenue (R) Revenue (MR) Revenue (AR) \$6 0 \$0 --- --- 5 1 5 \$5 \$5 4 2 8 3 4 3 3 9 1 3 2 4 8 -1 2 1 5 5 -3 1 To see the relationship among total, average, and marginal revenue, consider a firm facing the following demand curve: P = 6 – Q Econ 100A Mortimer

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MONOPOLY Average Revenue and Marginal Revenue The monopolist’s demand curve is the market demand curve. Average and marginal revenue are shown for the demand curve P = 6 − Q. Average Revenue = Total Revenue/Q = PQ/Q = P. Thus, the monopolist’s AR curve is the market demand curve. Marginal Revenue = ΔR/ΔQ Recall AR=MR for a competitive firm. For a monopolist, MR<AR. Econ 100A Mortimer
MONOPOLY The Monopolist’s Output Decision Q * is the output level at which MR = MC. If the firm produces a smaller output—say, Q 1 —it sacrifices some profit because the extra revenue that could be earned from producing and selling the units between Q 1 and Q * exceeds the cost of producing them. Similarly, expanding output from Q * to Q 2 would reduce profit because the additional cost would exceed the additional revenue. Profit Is Maximized When Marginal Revenue Equals Marginal Cost Econ 100A Mortimer

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MONOPOLY The Monopolist’s Output Decision We can also see algebraically that Q * maximizes profit. Profit π is the difference between revenue and cost, both of which depend on Q : As Q is increased from zero, profit will increase until it reaches a maximum and then begin to decrease. Thus the profit-maximizing Q is such that the incremental profit resulting from a small increase in Q is just zero (i.e., Δ π Q = 0). Then Δ R Q is marginal revenue and Δ C Q is marginal cost. Thus the profit-maximizing condition is that , or Econ 100A Mortimer
MONOPOLY Part (a) shows total revenue R , total cost C , and profit, the difference between the two. Part (b) shows average and marginal revenue (AR and MR) and average and marginal cost (AC and MC). • MR is the slope of the total revenue curve (∆R/∆Q), and MC is the slope of the total cost curve(ΔC/ΔQ). • The profit-maximizing output is Q * = 10, the point where MR equals MC. • At this output level, the slope of the profit curve is zero, and the slopes of the total revenue and total cost curves are equal. • The profit per unit is \$15, the difference

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## This note was uploaded on 09/27/2009 for the course ECON 100 taught by Professor Staff during the Spring '08 term at University of California, Berkeley.

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Ch 10 Market power - 10 MARKET POWER Econ 100A Mortimer...

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