Lecture 8 - Monopoly Mercedes Miranda BE530 1 1....

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Mercedes Miranda BE530 1 Monopoly
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2 1. Monopoly Versus Perfect Competition Competitive firms are price takers , Monopoly firms are price makers . Firm is considered a monopoly if … Sole seller of its product. No close substitutes.
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3 Monopoly Is the sole producer Faces a downward-sloping demand curve Is a price maker Reduces price to increase sales
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4 Competitive Firm Is one of many producers Is a price taker Faces a horizontal demand curve Sells as much or as little at same price
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5 Fig. 1 Demand Curves for Competitive & Monopoly Firms Quantity of Output Demand (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve 0 Price Quantity of Output 0 Price Demand
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6 A Monopoly’s Revenue Total Revenue P × Q = R Average Revenue R/Q = P Marginal Revenue R/ Q = MR A monopolist’s marginal revenue is always less than the price of its good. The demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.
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7 A Monopoly’s Marginal Revenue When a monopoly amount it sells, two effects on total revenue ( P × Q ). The output effect —more output is sold, so Q is higher. The price effect —price falls, so P is lower.
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8 Fig. 2 Demand & Marginal-Revenue Curves for a Monopoly Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 0 –1 –2 –3 –4 Demand (average revenue) Marginal revenue 1 2 3 4 5 6 7 8
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