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Lecture+17+November+4

Lecture+17+November+4 - Today’s Agenda • Monopoly •...

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Unformatted text preview: Today’s 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 • Firm’s 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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Lecture+17+November+4 - Today’s Agenda • Monopoly •...

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