Six per page_Week 10 Lecture Notes_ECON2101_S1_2010

Six per page_Week 10 Lecture Notes_ECON2101_S1_2010 -...

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1 Monopoly Chapter 24 Sections 1 - 5 Things to do Monopolist’s profit maximization: Choose Y to maximize P(Y)Y- C(Y) Key condition: Marginal Revenue (MR) = Marginal Cost (MC) Monopoly pricing and elasticity of WEEK 10 ECON2101 S1 2010 2 Monopoly pricing and elasticity of demand Inefficiency of monopoly and deadweight loss Profit tax (a % of profit is taxed) Quantity tax (tax per unit of output) What causes monopolies? a legal fiat; e.g. Postal Service in several countries a patent; e.g. a new drug sole ownership of a resource; e.g. a toll highway WEEK 10 ECON2101 S1 2010 3 formation of a cartel; e.g. OPEC large economies of scale; e.g. local utility companies. Pure Monopoly Main difference with competition: MONOPOLIST recognizes that output influences price and hence does not take price as given. WEEK 10 ECON2101 S1 2010 4 A perfectly competitive firm takes prices as given General Problem Monopolist seeks to maximize its economic profit, R(y) = revenue as a function of y ). ( ) ( ) ( ) ( ) ( y c y R y c y y p y WEEK 10 ECON2101 S1 2010 5 p(y) = price as a function of y What output level y* maximizes profit? Profit-Maximization ). ( ) ( ) ( ) ( ) ( y c y y p y c y R y At the profit-maximizing output level y*   dy d p y y dc y () ( )  0 WEEK 10 ECON2101 S1 2010 6 dy dy dy so, for y = y*,  d pyy dc y .
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2 What does the condition say? Left-hand side expresses how does total revenue change as y changes (MARGINAL  d dy pyy dc y dy () . WEEK 10 ECON2101 S1 2010 7 revenue change as y changes (MARGINAL REVENUE) Right-hand side express how total cost
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Six per page_Week 10 Lecture Notes_ECON2101_S1_2010 -...

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