Chapter 11 - 4/28/2011 1 Chapter 11 Monopoly I think it’s...

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Unformatted text preview: 4/28/2011 1 Chapter 11 Monopoly I think it’s wrong that only one company makes the game Monopoly. Steven Wright ECO N’201 – Spring 2011 11-2 Chapter 11 Outline 11.1 Monopoly Profit Maximization 11.2 Market Power 11.3 Welfare Effects of Monopoly 11.4 Taxes and Monopoly 11.5 Cost Advantages that Create Monopolies 11.6 Government Actions that Create Monopolies 11.7 Government Actions that Reduce Market Power 11.8 Monopoly Decisions Over Time and Behavioral Economics ECO N’201 – Spring 2011 11-3 11.1 Monopoly Profit Maximization • A monopoly is the only supplier of a good for which there is no close substitute. • Monopolies are not price takers like competitive firms • Monopoly output is the market output • Monopoly demand curve is the market demand curve • Monopolists can set their own price given market demand • Because demand is downward sloping, monopolists set price above marginal cost to maximize profit. • Like all firms, monopolies maximize profits by setting price or output so that marginal revenue (MR) equals marginal cost (MC). 4/28/2011 2 ECO N’201 – Spring 2011 11-4 11.1 Monopoly Profit Maximization • Monopolies maximize profits by setting price or output so that marginal revenue (MR) equals marginal cost (MC). • Profit function to be maximized by choosing output, Q : • ( Q ) = R( Q ) – C( Q ), where • R( Q ) is the revenue function • C( Q ) is the cost function • The necessary condition for profit maximization: • The sufficient condition for profit maximization: ECO N’201 – Spring 2011 11-5 11.1 Monopoly Profit Maximization • A firm’s MR curve depends on its demand curve. • MR is also downward sloping and lies below D • If p ( Q ) is the inverse demand function, which shows the price received for selling Q , then the marginal revenue function is: • Given a positive value of Q , MR lies below inverse demand. • Selling one more unit requires the monopolist to lower the price • Price is lowered on the marginal unit and all other units sold ECO N’201 – Spring 2011 11-6 11.1 Monopoly Profit Maximization • Monopoly’s marginal revenue is less than the price it charges by an amount equal to area C 4/28/2011 3 ECO N’201 – Spring 2011 11-7 Average and Marginal Revenue P r ic e , p , $ per unit q q + 1 Quantit y , q , Units per y ear p 1 (a) Competiti v e Fi r m Demand cu r v e A B Q Q + 1 Quantit y , Q , Units per y ear p 1 p 2 P r ic e , p , $ per unit (b) Monopoly Demand cu r v e A B C ECO N’201 – Spring 2011 11-8 11.1 MR Curve and Price Elasticity of Demand • We can rewrite MR function so that it is stated in terms of elasticity: • This makes the relationship between MR, D, and elasticity quite clear....
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Chapter 11 - 4/28/2011 1 Chapter 11 Monopoly I think it’s...

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