CN_intromicro_ch12

CN_intromicro_ch12 - 1 Chapter 12 Characteristics of...

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Unformatted text preview: 1 Chapter 12 Characteristics of Monopoly • One large firm • Product has no close substitutes • Barrier to entry Sources of Monopoly • Ownership of Resource – Firm is the only possessor of needed resource. (Example: DeBeers maintains exclusive rights to the almost all diamond mines. • Government franchise – Government permits only one firm the ability to provide a particular good or service. (Example: Postal Service, Adelphia Cable in the city of Buffalo.) • Patent/Copyright – Government grants exclusivity to a firm or individual as a reward for intellectual innovation. (Example: Pharmaceuticals, Books, Songs) Monopolist Faces Downward Sloping Demand Curve Since the monopolist is the only provider of a good or service he is the industry and therefore faces the industry demand curve for his product. Implications of Downward Sloping Demand Curve • Marginal revenue is almost always less than price. • Monopolist produces on the elastic section of the demand curve. 2 If the monopolist wishes to sell an additional unit of output he must lower the price. For simplicity we will assume that the firm is unable to price discriminate. (The firm is unable to charge different prices for different units or to different people.) This causes the monopolist to lower the price of all units just to sell one more unit. It is this that causes the marginal revenue to be less than the price for all except the first unit sold. To illustrate let’s assume that the monopolist faces demand Q D = 10 - P. Quantity Price Total Marginal Marginal Demanded Revenue Revenue Revenue 10 – – 1 9 9 9 9 2 8 16 7 8 + (8-9) = 7 3 7 21 5 7 + (7-8) + (7-8) = 5 4 6 24 3 6 + (6-7) + (6-7) + (6-7) = 3 5 5 25 1 5 + 4*(5-6) = 1 6 4 24-1 4 + 5*(4-5) = -1 7 3 21-3 3 + 6*(3-4) = -3 8 2 16-5 2 + 7*(2-3) = -5 9 1 9-7 1 + 8*(1-2) = -7 10-9 0 + 9*(0-1) = -9 When the monopolist charges $10 he is unable to sell any units. However, if he decides to lower the price to $9 then he sells 1 unit. The total revenue is $9 and since he had zero revenue before the marginal revenue is $9. This is the only time that the marginal revenue will be equal to the price. If the monopolist wishes to sell 2 units he must lower the price on all units from $9 to $8. He now sells 2 units so the total revenue is now 2*$8 = $16. We know that the marginal revenue is $16 - $9 = $7. Notice that the marginal revenue is less than the price that’s because the monopolist had to lower the price on the first unit he was selling. When the monopolist decided to sell the second unit he was able to sell one more unit and increase his revenue by $8. However, to achieve this gain he was forced to lower the price on the first unit. He was getting $9 but now sells it for $8. A change in total revenue of $-1. When combined the net effect is a change in total revenue of 8 + (9-8) = 8 - 1 = $7. 3 Profit Maximization for the Monopolist The total revenue curve for the monopolist is a parabola with its maximum occurring at the...
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CN_intromicro_ch12 - 1 Chapter 12 Characteristics of...

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