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3.22.10 – Lecture Notes, Econ 201

3.22.10 – Lecture Notes, Econ 201 - Ex if...

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3.22.10 – Lecture Notes, Econ 201 MONOPOLY 1. Monopoly on Resources 2. Government Created a. Patent – 20 years b. Franchise 3. Natural Monopoly a. When single firm can produce at the cheapest price MONOPOLY ANALYSIS Key difference from Perfect Competition: DEMAND in perfect competition firm’s price elasticity perfectly horizontal MONOPOLY Firm = Industry, Demand Curve is downward sloping To sell more, must lower price. A PRICE MAKER MR is no longer equal to Price MR P REVENUE CURVES FOR A MONOPOLIST The market demand curve for a good is the firm’s average revenue curve. WHY IS MR < PRICE? Ex: from 1 to 2 on Worksheet Due to PRICE EFFECT P = AR in a monopoly GREEN RULE FOR PROFIT MAXIMIZATION Output where: MR = MC WHAT PRICE? DO THE DEMAND CURVE MARK UP PRICING (Cost)(Mark-Up) = Price Cost = Marginal or Average Variable Mark up = E D /E D – 1 (E D = Price elasticity of demand) IGNORE ALL OTHER ELASTICITIES OF DEMAND
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Unformatted text preview: Ex: if PED = 3, then 3/3-1 = 1.5 & if MC = $40, ($40)(1.5) = $60 If PED = 11, then 11/11-1 = 1.1 & if MC = $40, then (40)(1.1) = $44 MORE ELASTIC, MORE SUBSTITUTUES, LESS PRICE MARK UP! (Higher Number = More Elastic) The higher the E, the Lower the mark-up The lower the E, the higher the Mark-Up UNIT PROFITS PRICE – ATC = PROFIT/UNIT To compute the amount of profits in monopoly, find average profit (AR – AC) at the profit maximizing output and multiply by Q Total Profit: (profit/unit) (total output) LOSS POSSIBLE IN SHORT RUN?-Yes AC curve could go WAY UP (AVC) LONG RUN?-Economic Profits are possible -There can be no new firms entering Long run equilibrium 1. Economic profits possible 2. No Production at Lowest Possible Cost 3. Price > MC a. Price higher, output lower than in perfect competition MC curve is the Supply Curve = MC ssssssssupply!...
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