18-Monopoly - Monopoly Reading: Chapter 10 (section 10.1)...

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Monopoly Reading: Chapter 10 (section 10.1)
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Review of Perfect Competition Homogenous product Large number of buyers and sellers Free entry/exit Firms are price takers P = LMC = min LRAC Zero economic profits in the long run
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Monopoly Monopoly: market with only one supplier of a good for which there are no close substitutes Market power : firm’s ability to affect the price of a good (firms are price-setters) Monopolist’s output is the market supply Monopolist’s demand is the market demand – downward-sloping!
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Monopoly Profits are maximized at the level of output where MR=MC But MR and AR are no longer equal to each other and constant Monopolist’s average revenue , price received per unit sold, is the market demand curve: AR=P(Q) When demand is downward sloping, marginal revenue is below the price (average revenue): to increase sales the price must fall: ( ) ( ) MR P Q P Q Q = +
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Average and Marginal Revenue Output 1 2 3 4 5 6 7 0 1 2 3 $ per unit of output 4 5 6 7 Average Revenue (Demand) Marginal Revenue
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18-Monopoly - Monopoly Reading: Chapter 10 (section 10.1)...

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