Topic09_monopoly

# Topic09_monopoly - Topic 09 Topic 09 Monopoly Dr Ratna K...

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opic 09 Topic 09 Monopoly r Ratna K Shrestha Dr. Ratna K. Shrestha

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onopoly Monopoly In a competitive market, individual firms ave no control whatsoever over the prices have no control whatsoever over the prices they charge. a monopoly market, a single firm serves In a monopoly market, a single firm serves the entire market and so it can decide the price it charges. Monopoly 1. One seller - many buyers 2. One product (no good substitutes) 3. Barriers to entry 2 4. Price setter
arginal Revenue and Demand Marginal Revenue and Demand As a single supplier, a monopolist faces the entire (downward sloping) market demand. However, MR is not equal to (but less than) price as the monopolist must reduce price to sell more (due to downward sloping demand). MR < P. So a monopolist’s MR curve lies below its demand curve at every positive quantity. 3

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Marginal Revenue g 4
verage & Marginal Revenue Average & Marginal Revenue Finding Marginal Revenue g Ass me a monopolist ith demand e.g.: Assume a monopolist with demand: P = 6 - Q 5

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Average and Marginal Revenue \$ per 7 unit of output 6 4 5 Average Revenue (Demand) 3 1 2 Marginal Revenue 6 Output 1234567 0
onopoly Monopoly Note: for a linear demand, the monopolist’s MR curve has: Same intercept as demand but twice the slope. Example: if demand curve is given by Q = 30 - 3P, then inverse demand P = 10 – Q/3. Y-intercept = 10 and slope = 1/3. this case R = PQ = (10 /3)Q and In this case, R = PQ = (10 – Q/3)Q and MR = 10 – 2Q/3. Notice that y-intercept is e same but the slope is twice as much 7 the same but the slope is twice as much.

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Monopolist Output Decision A monopolist maximizes profits where MR = MC. If MR > MC, profits can be increased by producing more. On the other hand if MR < MC, profits can e increased by decreasing output be increased by decreasing output. That means profits is maximized when MR MC At any other output levels other = MC. At any other output levels other than the level where MR = MC, profits are smaller. 8
Monopolist Output Decision At the output level where MR = MC, consumers are willing to pay P m and so the monopolist charges that price which is higher an the competitive price than the competitive price.

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Topic09_monopoly - Topic 09 Topic 09 Monopoly Dr Ratna K...

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