Coursenotes_ECON301

# The following table lists some of the possible

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Unformatted text preview: ase 1 2 3 4 5 6 7 Consumer Producer Consumer Producer Consumer Producer Consumer Producer Consumer Producer Consumer Producer Consumer Producer Goods Market Competitive Competitive Competitive Monopoly Monopsony Competitive Monopsony Monopoly Competitive Competitive Competitive Competitive Competitive Competitive Labour Market Competitive Competitive Competitive Competitive Competitive Competitive Competitive Competitive Competitive Monopsony Monopoly Competitive Monopoly Monopsony While competitive firms must take the market price (price-takers), P in the goods market and w in the labour market, monopolists and monopsonists operate with different rules for optimality. Namely, downward sloping demand curves for monopolists and upward sloping supply curves for monopsonists. As a consequence, we need to incorporate the corresponding marginal curve into the optimal decision of these non-competitive agents accordingly. For example, 62 [1] Monopolist in the goods market... In case 2 above, the firm is a monopolist in the goods market (the only seller). The relevant variable in the optimal decision is the marginal revenue, MR, instead of the exogenously fixed output price, P, when dealing with PC markets. As a result, the marginal revenue product is defined as MRP = MP MR instead of MRP = MP P and the optimal decision rule of the firm in the competitive labour market is: MRP = w or, MP MR = w So, the firm wants to maximize TR TC. Perfect Competition P Monopoly P P* D = AR = MR MR Q D = AR Q Max {P(Q) Q C(Q)} Q FOCQ P(Q) + Q P(Q) = C(Q) [MRQ] = [MCQ] Rearranging, P(Q) - C(Q) = - Q P(Q) 63 and dividing both sides by P(Q) gives us the percentage markup on the left hand side: P(Q) - C(Q) = - Q P(Q) P(Q) P(Q) But what is the right hand side? Remember, P(Q) is simply the P / Q P(Q) - C(Q) = - __Q__ P(Q) P(Q) P P(Q) - C(Q) = - __Q__ P P(Q) P Q and the right hand side is simply, 1 / or the Lerner condition we learned in ECON 201. How is the RHS = 1 / ? _____1______ = - __Q__ P P Q - _P_ Q Q P So, the monopolist has a percentage markup that is equal to 1 / , as follows: P(Q) - C(Q) = __1__ P(Q) [% markup] = __1__ [2] Monopsonist in the labour market... If the...
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## This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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