Ch11 - Title: Greenbacks Artist: Ray Charles Economic...

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1 • Title: Greenbacks • Artist: Ray Charles Economic concept prostitution money as store of valu Economic concept: prostitution, money as store of value • Representative lyrics: She said, "My name's Flo, and you're on the right track, But look here, daddy, I wear furs on my back, So if you want to have fun in this man's land, So if you want to have fun in this man s land, Let Lincoln and Jackson start shaking hands." On a greenback, greenback dollar bill Just a little piece of paper, coated with chlorophyll PAM 2000: Intermediate Microeconomics Prof. John Cawley Chapter 11: Monopoly
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2 Where We Are Consumer Theory Individual Demand Theory of Production Costs of Production Factor Individual Demand Market Demand Perfect Competition Imperfect Competition: Monopoly Monopolistic Competition Prices Markets Oligopoly General Equilibrium Market Imperfections Strategy Game Theory Outline • Monopoly profit maximization • Market power • Welfare effects of monopoly • Causes of monopoly • Government actions that reduce market power
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3 Monopoly • Only supplier of a good for which there is no close substitut substitute • Firm output = entire market output – Firm faces entire downward-sloping market demand curve • Monopolist can set the price of the good – Unlike a firm in a competitive market, is not a price taker Monopoly Profit Maximization All firms whether monopolists or in a competitive • All firms -- whether monopolists or in a competitive market -- maximize profits by choosing output such that marginal revenue = marginal costs • However: – For firms in competitive markets, marginal revenue = price and does not vary with firm’s output – For monopolists, marginal revenue π price and does vary with output
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4 Marginal Revenue for a Firm In a Competitive Market Price p Demand curve A B q1 q2 Quantity Price Marginal Revenue for a Monopolist p1 p2 Demand curve C Q1 Q2 Quantity AB
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5 For all linear demand curves the monopolist’s Marginal Revenue for a Monopolist • For all linear demand curves, the monopolist s MR curve: – Starts at same point on vertical (price) axis – Is twice as steep as the demand curve • So MR hits horizontal axis at half the quantity as the demand curve MR Along the Linear Demand Curve Q=A-BP P A/B A/2B A/2 AQ 0 Marginal Revenue Curve Demand Curve
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6 Marginal revenue at any quantity determined by Marginal Revenue for a Monopolist • Marginal revenue at any quantity determined by: – Price – Price elasticity of demand: 1 (1 ) MR p ε = + where: = price = price elasticity of demand p • Implications: – MR positive (and close to price) when demand Marginal Revenue for a Monopolist highly elastic – MR equals zero when demand unit elastic 11 ) ) M Rp p p =+ −∞ ) ) (1 1) 0 MR p p p ++ – MR negative when demand inelastic 1 = + = + =− = ) ) (1 4) 3 .25 M p p p =
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7 MR and Price Elasticity Along the Linear Demand Curve Q=A-BP P A/B Perfectly elastic A/2B Elastic Unitary elastic Inelastic 1 ε < − 1 = − 01 A/2 AQ 0 Perfectly inelastic >> Marginal Revenue Curve Demand Curve
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This note was uploaded on 11/12/2009 for the course PAM 2000 at Cornell.

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Ch11 - Title: Greenbacks Artist: Ray Charles Economic...

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