CHAPTER 15 MONOPOLY 325 cost, it uses the demand curve to find the price consistent with that quantity. In Figure 15-4, the profit-maximizing price is found at point B. We can now see a key difference between markets with competitive firms and markets with a monopoly firm: In competitive markets, price equals marginal cost. In monopolized markets, price exceeds marginal cost. As we will see in a moment, this finding is crucial to understanding the social cost of monopoly. A MONOPOLY’S PROFIT How much profit does the monopoly make? To see the monopoly’s profit, recall that profit equals total revenue ( TR ) minus total costs ( TC ): Profit ± TR ² TC. We can rewrite this as Profit ± ( TR / Q ² TC / Q ) ³ Q. TR / Q is average revenue, which equals the price P, and TC / Q is average total cost ATC. Therefore, Profit ± ( P ² ATC ) ³ Q. This equation for profit (which is the same as the profit equation for competitive firms) allows us to measure the monopolist’s profit in our graph. Consider the shaded box in Figure 15-5. The height of the box (the segment
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.