Lecture+17+November+4

Lecture+17+November+4 - Todays Agenda Monopoly Output and...

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Unformatted text preview: Todays Agenda Monopoly Output and price determination Inefficiency of monopoly Natural monopoly Price discrimination Oligopoly Measuring market power Monopoly power Monopoly power: power over price Price making v . price taking When can a firm influence price? When firms products are differentiated When a firm produces a large share of industry output When a single firm produces all industry output Pure monopoly Single seller Firms demand curve = market demand curve Relationship between P and MR Q $/Q D Relationship between P and MR Q $/Q D P Q Relationship between P and MR Q $/Q D P Q Relationship between P and MR Q $/Q D P Q Q +1 P 1 Relationship between P and MR Q $/Q D P Q Q +1 P 1 Revenue loss Revenue gain P > MR Q $/Q D P Q Q +1 P 1 Area = 1 x P 1 Q $/Q D, AR MR Q $ TR TR, AR, MR, and elasticity relationships P > MR MR > 0 when | elasticity | > 1 MR < 0 when | elasticity | < 1 MR = 0 when | elasticity | = 1 and TR is maximized P > MR Q $/Q D MR If P = a - bQ, then MR = a - 2bQ Why? TR = PQ = aQ bQ 2 MR = d(TR)/dQ Profit-maximizing Q and P Q $/Q MR SATC SMC D Profit-maximizing Q and P: MR = SMC Q $/Q MR SATC SMC D Q m Profit-maximizing Q and P: MR = SMC Q $/Q MR SATC SMC D Q m P m Economic profit Q $/Q MR SATC SMC D Q m P m Economic profit Q $/Q MR SATC SMC D Q m P m STC Profit Must a monopoly be profitable? Q $/Q SATC AVC SMC D MR Must a monopoly be profitable? Q $/Q SATC AVC SMC D MR Q m P m Monopolist must cover variable costs Q $/Q SATC AVC SMC D MR Q m P m Produce at MR = SMC, but only if P > AVC Q $/Q SATC AVC SMC D MR Q m P m Long run optimum Q $/Q LAC LMC MR D Long run optimum Q $/Q LAC LMC MR D Q m Long run optimum Q $/Q P m LAC LMC MR D Q m Long run optimum Q $/Q P m LAC LMC MR D Q m SATC Long run optimum Q $/Q P m LAC LMC MR D Q m SATC SMC Long-run optimum MR = LMC zero profits not necessary Profits will always tend to be driven to zero, however, unless some mechanism prevents entry. Barriers to entry artificial barriers natural barriers Artificial barriers to entry patents advertising other activities of incumbent firms Natural barriers to entry minimum efficient scale...
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This note was uploaded on 11/10/2011 for the course ECON 220:102 taught by Professor Rubin during the Fall '11 term at Rutgers.

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Lecture+17+November+4 - Todays Agenda Monopoly Output and...

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