Chapter 9

Chapter 9 - Chapter 9 (24): Monopoly Market Power Market...

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Chapter 9 (24): Monopoly Market Power Market power is the ability of the producer to alter the price of the product and have P > MC. In chapter (8) 23 for perfect competition, there are 2000 catfish producers. Under perfect competition, the product is homogenous . No individual catfish producer has the ability to alter price of catfish. The demand for this producer is a horizontal line . This means the perfectly competitive producer is a price taker. The price is set by the market which can alter the price and the firm is a price-taker. If the perfectly competitive firm increases the price it would lose all its customers. Only the firms collectively can change output and consequently the price. Downward sloping demand curve: If the firm has market power , then it can alter the price of its product without losing all its customers because some customers will continue to buy. In this case, firms with market power confront a downward sloping demand curve for their own output. Figure: demand curve for firms with market power Monopoly
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The entire output in the market can be produced by a single firm . In this case, the firm is a monopoly. So the monopolistic firm is the market . Therefore, the demand curve facing the monopolist is identical to the market demand curve for the product, and thus has a downward slope. Figure: Demand curve for monopoly Price, Marginal Revenue and Marginal cost Marginal revenue is the contribution of the additional unit of output to the total revenue. MR = Δ TR / Δ Output = (TR 2 - TR 1 )/(Q 2 - Q 1 ). If the demand curve is downward sloping then the contribution of each additional unit and all the previous units decline as output increases.
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Conclusion: Price is not constant and MR is lower than the price under monopoly. MR < P
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This note was uploaded on 01/12/2012 for the course ECON 201 taught by Professor Joyce during the Fall '07 term at Drexel.

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Chapter 9 - Chapter 9 (24): Monopoly Market Power Market...

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