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

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
MARKET POWER 10 Econ 100A Mortimer
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 4
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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 6
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
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 36

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

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online