Lecture Notes 9

Lecture Notes 9 - 21/02/11 Firm operating in perfect...

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21/02/11 Firm operating in perfect competition establishes a market equilibrium at a quantity produced where P = MR = MC = ACmin P = MC is a socially desirable result Monopoly: Perfect competition: lots of individual sellers with no control over market price Monopoly: a situation in which there is only one firm in an industry; the industry and the firm are one in the same. This arises with o Government barriers: licensing contracts, patent, regulation, ownership, o Large economies of scale: high production to achieve lowest possible cost of production – AC = AFC + AVC High startup (fixed) costs perhaps limits advantages to entering an industry o Control of a resource, important or key input o Network externalities o Cartels (mergers, acquisitions) All of these factors are high barriers to entry – hard for a firm to enter an industry – prevention of competition Monopoly: single seller of a particular good The industry demand curve is also the firm’s demand curve How can a monopoly sell more? It must lower the price of the good. A firm in perfect competition had a horizontal, perfectly elastic curve. To sell more a perfectly competitive firm only had to produce more at the going price To sell additional units of a good, the firm has to lower the price. What does the area represent moving down the cost curve? There is a loss though, as all buyers experience the lower price of the good. There is a loss from the customers who were willing to pay the higher price o P > MRis the result o MR has twice the slope of the demand curve o P = a – bQ – equation of a demand curve A – the intercept term QP = (a-bQ)*Q TR = aQ-bQ^2 = a – 2bQ o Point at which elasticity = 1, total revenue is maximized here, E > 1 to the left of this point, E < 1 to the right o MC is an upward sloping line o What is the best course of action for a monopoly? MC = MR = Q* at this point is the level of output that is desirable – price is determined by this Q* point. Can a monopolist decide on both price and quantity? No, there is a choice, a trade-off to be made as the demand condition decides the other variable – an equilibrium situation Is this monopolist making an economic profit or loss?
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o MC intersects AC at ACmin o TR = OPmAQm o TC = OCC’Qm o Profit = the difference, (P – AC)*Q A monopolist makes an economic profit
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This note was uploaded on 09/08/2011 for the course ECON 101 taught by Professor Gulati during the Spring '11 term at Columbia.

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Lecture Notes 9 - 21/02/11 Firm operating in perfect...

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