Lecture 6 - Lecture 6 Monopoly vs Perfect Competition...

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Lecture 6 Monopoly vs Perfect Competition Perfect Price Discrimination Natural Monopolies Introduction to Cartels Chapter 9: Monopoly, Oligopoly, and Monopolistic Competition A. Total revenue and marginal revenue B. Total cost, marginal cost and fixed cost C. Profit maximization D. Monopoly E. Perfect competition F. Comparison between perfect competition and monopoly Monopoly: • One firm controls entire market, MR < P • Profit maximization calls for MR = MC Perfect competition: • Many firms compete, MR = P • Profit maximization calls for P = MC • Implication: under perfect competition, supply curve is the MC curve demand demand supply Marginal cost MR P1 Q1 Monopolist chooses (Q1,P1) Q2 P2 Perfect competition results in (Q2,P2) Price Quantity Price Quantity If one single company controlled all the tomato farms, what would be the result?
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Q P demand MR MC Q1 P1 Monopolist chooses (Q1,P1) Q2 P2 Perfect competition results in (Q2,P2) Q1 < Q2 P1 > P2 (same as competitive supply) Conclusion: monopoly results in a higher price and less output being produced Consumers worse off under monopoly demand demand supply Marginal cost MR P1 Q1 Consumer surplus under monopoly Q2 P2 Consumer surplus under perfect comp Firms better off under monopoly demand demand supply Marginal cost MR P1 Q1 Producer surplus under monopoly Q2 P2 Producer surplus under perfect comp Society worse off under monopoly demand demand supply Marginal cost MR P1 Q1 Total surplus under monopoly Q2 P2 Total surplus under perfect comp Society worse off under monopoly demand demand supply Marginal cost MR P1 Q1 Deadweight loss under monopoly Q2 P2 Total surplus under perfect comp
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Adam Smith (1776): An individual producer “neither intends to promote the public interest, nor knows how much he is promoting it . .. [but is] led by an invisible hand to promote an end which was no part of his intention.” Why “invisible hand” works under perfect competition: Marginal cost to firm from producing one more unit = resources that must be surrendered to produce the good Marginal benefit to customer from producing one more unit is the price they’re willing to pay
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This note was uploaded on 11/07/2010 for the course ECON ECON 2 taught by Professor Hamilton during the Fall '09 term at UCSD.

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Lecture 6 - Lecture 6 Monopoly vs Perfect Competition...

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