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301lec19

# 301lec19 - Lecture 19 Econ 301 Professor S Severinov...

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Lecture 19 Econ 301 Professor S. Severinov Monopoly and Monopsony

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Topics to be Discussed Monopoly and Monopoly Power Sources of Monopoly Power The Social Costs of Monopoly Power Read: chapter 10 except 10.5 and 10.6
Total and Marginal Revenue Monopoly – a single firm serving the whole market. It has the demand curve to itself. The monopolist’s total revenue is price times quantity TR=PQ(P) where Q(P) is demand at price P The monopolist’s average revenue is TR/Q=P(Q) - price received per unit sold. It is the market demand curve

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Average and Marginal Revenue An important new notion: marginal revenue , change in revenue resulting from a unit change in output Marginal revenue is a change in revenue from a unit change in quantity dTR/dQ
Marginal Revenue To compute marginal revenue, first We invert the demand curve function Q=Q D (P) to express prices as a function of quantity P=P(Q) This is called inverse demand function.

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Marginal Revenue Using the inverse demand function, we write the revenue as follows: TR(Q)=P(Q)Q Marginal revenue MR= dTR(Q)/dQ =P(Q)+P'(Q)<P(Q) The inequality follows since P'(Q)<0 –downward sloping demand
Average and Marginal Revenue Output 1 2 3 4 5 6 7 0 1 2 3 \$ per unit of output 4 5 6 7 Average Revenue (Demand) Marginal Revenue

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Average and Marginal Revenue Finding Marginal Revenue Suppose that the demand is Q=6 – P Then the inverse demand is P = 6 – Q Total revenue TR(Q)=Q(6-Q)=6Q-Q 2 Marginal revenue: dTR(Q)/dQ=6-2Q Average Revenue is AR=6-Q
Monopoly vs. Competitive Firm Observations 1. For a monopoly, to increase sales it has to lower its price 2. Therefore, for a monopoly MR < P 3. But under perfect competition No change in price to change sales For a competitive firm, MR = P

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Monopolist’s Output Decision -profit maximization Monopolist Profits are maximized at the output level where MR = MC.
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301lec19 - Lecture 19 Econ 301 Professor S Severinov...

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