Coursenotes_ECON301

Profits can be positive negative or zero depending on

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Unformatted text preview: d as the product of price and quantity TR = P Q and the corresponding marginal revenue is defined as the change in the total revenue as a result of a change in the quantity, Q. MR = TR Q = PQ + QP Q = P + Q(P/Q) Multiplying and dividing the last term on the RHS by one (P/P), we get... = P + P Q P P Q = P + P (P/P) (Q/Q) = P + P (%P) (%Q) 271 = P + P ___1__ (%Q) (%P) = P + P __-1__ - (%Q) (%P) Noticing, as I'm sure all of you have, that the ratio of the two percentage changes in the denominator is simply the price elasticity of demand = - (%Q) (%P) we can, therefore, rewrite our MR expression as... MR = P + P __-1__ - (%Q) (%P) MR = P + P __-1__ MR = P [1 1/] In other words, the marginal revenue (MR) is linked to the price (P) by the price elasticity of demand () according to the formula: MR = P [1 1/] In the limiting case of a horizontal demand curve (perfectly competitive firm demands), the price elasticity of demand is approaching infinity and the marginal revenue is equal to the price MR = P This is the case of the perfectly competitive market structure. How does monopoly compare to this result? Well, we know that under perfect competition output is determined by P = MC where the horizontal demand curve PC intersects the marginal cost curve MC at the minimum point of the average cost curve AC. 272 On the other hand, with a monopoly, the output is determined by the rule MR = MC where the marginal revenue curve MR intersects the marginal cost curve MC at a point to the left of the minimum point of the average cost curve AC. P AC MC PM PC = MRC DM MR QM QC Q Since the marginal revenue curve is below the monopolist's market demand curve, the price charged by the monopolist is higher than the corresponding price under perfect competition. There will be a higher price and lower quantity under monopoly than under perfect competition. In other words, we have the following result: Monopoly is less efficient than Perfect Competition. Does this result hold under general equilibrium conditions? Our analysis above obtains the result that monopoly is less efficient than perfect competition using partial equilibrium...
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