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Unformatted text preview: Intermediate Microeco- nomics Part 6: Market Structure II: Monopoly Jim Campbell The monopolist’s problem Graphical analysis Markup Inefficiency of monopoly Natural monopoly Price discrimination Monopsony Intermediate Microeconomics Part 6: Market Structure II: Monopoly Jim Campbell October 10, 2007 Intermediate Microeco- nomics Part 6: Market Structure II: Monopoly Jim Campbell The monopolist’s problem Graphical analysis Markup Inefficiency of monopoly Natural monopoly Price discrimination Monopsony What’s market structure? • Let’s turn to one of the most loaded words in economics: monopoly. • Recall from part 5 that monopoly is “one large price-setting firm in an industry with barriers to entry.” • As we’ll see, the reason why “monopoly” is such a dirty word is that at worst they create inefficiency, and at best they transfer surplus from consumers to producers. Intermediate Microeco- nomics Part 6: Market Structure II: Monopoly Jim Campbell The monopolist’s problem Graphical analysis Markup Inefficiency of monopoly Natural monopoly Price discrimination Monopsony The monopolist’s problem • The monopolist faces the entire demand curve, being the only firm in the industry. • The monopolist’s objective is profit maximization: max y π = max y p ( y ) y − c ( y ) ⇒ dp ( y ) dy y + p ( y ) − dc ( y ) dy = 0 ⇒ dp ( y ) dy y + p ( y ) = dc ( y ) dy ⇒ MR = MC • The major difference from the perfectly competitive case is that the monopolist doesn’t simply face market price p ∗ , but faces price as a function of his output, p ( y ): since he faces the whole demand curve, his choice of y affects the market equilibrium price in the usual partial equilibrium way. Intermediate Microeco- nomics Part 6: Market Structure II: Monopoly Jim Campbell The monopolist’s problem Graphical analysis Markup Inefficiency of monopoly Natural monopoly Price discrimination Monopsony MR=MC • The solution to the monopolist’s problem that we just derived was MR = MC . That shouldn’t be surprising at all! • If MR > MC , increasing y yields more revenue than costs, so profit can be increased. • If MR < MC , a decrease in output saves more in costs than the loss in revenue, so profits can be increased. • And since there are barriers to entry in this industry, entry is not possible to exploit profitable opportunities (whose existence we’ll prove shortly). The long run analysis is identical: the monopolist can make profit in the long run. Intermediate Microeco- nomics Part 6: Market Structure II: Monopoly Jim Campbell The monopolist’s problem Graphical analysis Markup Inefficiency of monopoly Natural monopoly Price discrimination Monopsony Drawing the picture • The diagram for the monopolist’s decision is quite complicated but very important....
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This note was uploaded on 12/09/2010 for the course ECON 201 taught by Professor Manning during the Spring '09 term at Southern University at New Orleans .

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notes6 - Intermediate Microeco- nomics Part 6: Market...

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