SECTION VI OUTLINE

SECTION VI OUTLINE - I. SECTION VI MONOPOLY AND ITS SOURCES...

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I. SECTION VI – MONOPOLY AND ITS SOURCES a. Monopoly Demand Curve i. Monopoly – A single firm constitutes the entire industry because entry is blocked. It faces the downward sloping industry demand curve. b. Price Searchers’ Marginal Revenue i. Price-searchers or price-makers are firms facing downward sloping demand curves 1. An important consequence is that marginal revenue will be less than price for all firms MR<P ii. Why should MR be less than price when a firm’s demand curve slopes down? 1. Price along a demand curve is an average function. 2. When any average function such as price falls, the associated marginal function must lie below it 3. Marginal Revenue - MR is the change in total revenue c. Elasticity and Marginal Revenue i. If total revenue (TR) is constant we know: 1. MR must be 0 since the change in TR is 0 2. The elasticity of demand must be equal to 1 a. Above this, the demand is inelastic b. Below this, the demand is elastic ii. No profit maximizing firm, whether monopolist or not, ever sells in the inelastic portion of its demand 1. If a price-searcher is selling in the inelastic portion and cuts output by one unit, price will rise a. This increase in price also raises total revenue (TR) b. It also reduces total cost (TC) c. Profit will also increase d. Monopoly Output Price and Profit
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SECTION VI OUTLINE - I. SECTION VI MONOPOLY AND ITS SOURCES...

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