ECON_2306 => Lecture 7B Slides

ECON_2306 => Lecture 7B Slides - Pricing and Output...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 L7B: Pure L7B: Pure Monopoly (Chapter 10) Monopoly (Chapter 10) Principles of Microeconomics, SP 2010 1 Pricing and Output Decisions in Perfect Competition Observations in perfectly competitive markets: The earlier the firm enters a market, the better its chances of earning above earning above-normal profit (assuming a strong demand in the normal profit (assuming a strong demand in the market). Principles of Microeconomics, SP 2010 2 As new firms enter the market, firms that want to survive and perhaps thrive must find ways to produce at the lowest possible cost, or at least at cost levels below those of their competitors. Firms that find themselves unable to compete on the basis of cost might want to try competing on the basis of product differentiation instead. Pricing and Output Decisions in Monopoly Markets A monopoly market consists of one firm. The firm is the market. Has the power to establish any price it wants. However, the firm’s ability to set price is limited by Principles of Microeconomics, SP 2010 3 the demand curve for its product, and in particular, the price elasticity of demand. Pricing and Output Decisions in Monopoly Markets Assume demand is linear. It is downward sloping because the firm is a price setter. Assume MC is constant. Choose output where MR=MC, set price at P*. Principles of Microeconomics, SP 2010 4 If firm charges too high a price (e.g., P1), its MR>MC; hence it will be forgoing some marginal profit If it sets its price at too low a level, its MC>MR, and the firm will experience a marginal loss. A firm’s ability to set its price is limited by the demand curve and the price elasticity of demand for its product.
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Pricing and Output Decisions in Monopoly Markets Demand is the same as before, as is MR. MC is upward sloping, which shows diminishing Principles of Microeconomics, SP 2010 5 returns. Set output where MR=MC Q*=6 is the quantity that the firm would want to produce because this is the amount at which MR=MC. Implications of Perfect Competition and Monopoly for Decision Making Perfectly competitive market Most important lesson is that it is extremely difficult to make money. Must be as cost efficient as possible. It might pay for a firm to move into a market before others start to enter. Principles of Microeconomics, SP 2010 6 Monopoly market Most important lesson is not to be complacent or arrogant and assume their ability to earn economic profit can never be diminished. Changes in economics of a business eventually break down a dominating company’s monopolistic power. Pure Monopoly A pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. There are several characteristics that distinguish pure monopoly. There is a single seller so the firm and industry are synonymous.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/15/2010 for the course ECON 2306 taught by Professor Bailiff during the Spring '08 term at UT Arlington.

Page1 / 11

ECON_2306 => Lecture 7B Slides - Pricing and Output...

This preview shows document pages 1 - 3. Sign up to view the full document.

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