section16_1

section16_1 - Department of Economics University of...

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Unformatted text preview: Department of Economics University of California, Berkeley ECON 100A Spring 2010- Section 16 GSI: Antonio Rosato Monopoly This is a departure from the world of perfect competition, where there were 3 main assumptions: price taking; homogeneous products; free entry and exit. Two of the assumptions are relaxed the firm is not a price taker, and there are barriers to entry and exit. What does it mean that a firm is not a price taker? It does not act as if price is given and its production decisions do not affect price. It knows that the demand is down-sloping and how its output affects it. How does it know that? Because it is alone in the market. The firm is still maximizing profit, which is defined in the same way, as revenue minus costs. This leads to the same condition as before, MR = MC , but now MR is not the same thing: in a competitive market it was just the given market price, but now the price is not given, it is P ( Q ): ( Q ) = R ( Q )- C ( Q ) = P ( Q ) Q- C ( Q ) What is MR in this case? For a monopoly, it is less than the price as given by the demand curve. If the monopoly produces another unit, the price goes down by dP/dQ for all output Q , but the firm earns an additional P for the extra unit, and in total MR = dP/dQ Q + P . Remember that dP/dQ is negative because the demand curve...
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section16_1 - Department of Economics University of...

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