ch 11_Econ 281_Fall_2010

ch 11_Econ 281_Fall_2010 - Chapter 11: Monopoly and...

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Chapter 11: Monopoly and Monopsony Definition: A Monopoly Market consists of a single seller facing many buyers. Definition: A Monopsony Market consists of a single buyer facing many sellers.
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1. The Monopolist's Profit Maximization Problem      The Profit Maximization Condition Equilibrium The Inverse Elasticity Pricing Rule The Welfare Economics of a Monopoly 2. Factor Market (input market) 3. Monopsony
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MONOPOLY The monopolist has to decide the output (q) to produce and the price per unit to charge (P). For now we assume that the monopolist charges the same price on all the units of its output. Key IDEA Because in a monopoly there is only one firm, the firm’s demand curve is the market demand curve.
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Price Quantity P(Q), the (inverse) demand curve Q A The monopolist can choose between all points on the  Market Demand E.g. it can choose to produce Q A  (and therefore charge  price P A ) or produce Q B  (and therefore charge price P B ) A B Q B P B P A
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Individual firm Competitive market demand is different from the  Monopolist Demand P 0 Competitive firm Monopolist Demand facing firm Demand facing firm (market demand) Price Price Firm output Firm output
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P 0 P 1 C B Q 0 Q 0 +1 (Inverse) Demand facing firm Price Firm output Marginal Revenues Say the Monopolist increases the output from Q 0 to Q 0 +1. Then in order to sell all the output it has to decrease the charged price from P 0 to P 1 . Hence, the monopolist gains the increase in revenues of area B (because it sells one more unit) but it loses the revenues due to the price decrease (area C) on Q 0 units. At Q 0 the MR is the area B-C
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The MR  curve  lies below the demand  curve . Price Quantity P(Q), the (inverse) market demand curve MR(Q), the marginal revenue curve Q 0 Marginal Revenue Curve for a linear Demand
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Let the (inverse) Demand be P= a-bq. Then   MR(q)=a-2bq The MR slope is twice the slope of the (inverse)  demand  The intercept with the Price-axis is the same for  the (inverse) demand and the MR curve Price Quantity P(Q), the (inverse) demand curve MR(Q), the marginal revenue curve Q 0 P(Q 0 ) MR(Q 0 ) Marginal Revenue Curve and LINEAR Demand a/b a/2b
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If the market demand is Q=100-5P. Find the MR curve. First: find the inverse market demand. Solve for P in Q=100-5P. Find P=20-(q/5) that is P=20-0.2q Slope: -0.2 and intercept 20 Second: Then MR is MR(q) = 20-2*0.2 q, that is MR(q)= 20-0.4q Slope: -0.4 and intercept 20
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Sign of MR and Elasticity Recall that 1. If demand is elastic, a price fall increases total revenue. 2. If demand is inelastic, a price fall decreases total revenue. If the quantity that the monopolist wants to sell
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ch 11_Econ 281_Fall_2010 - Chapter 11: Monopoly and...

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