ability to profit from its market power o Goal is to maximize profits

Ability to profit from its market power o goal is to

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ability to profit from its market power o Goal is to maximize profits Difference between a competitive firm and a monopoly is the monopoly’s ability to influence the price of its output Competitive Competitive firm is small relative to the market, therefore, has no power to influence the price of its output o Takes the price as given by market conditions Competitive firm can sell as much or as little as it wants at the price faces a horizontal demand curve o Competitive firm sells a product with many perfect substitues, demand curve is perfectly elastic o Monopoly’s Revenue Total revenue = quantity sold x Price Average revenue = total Revenue / Quantity Average revenue = price Marginal revenue = total revenue received for each additional unit of output Change in total revenue when output increases by 1 unit Always less than the price of its good When a monopoly increases the amount it sells, this action has two effects on total revenue (PXQ) o The output effect: more output is sold which increases total revenue o Price effect: price falls, which decreases total revenue Marginal-revenue curve lies below its demand curve
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Marginal revenue is negative when the price effect on revenue is greater than the output effect. When the firm produces an extra unit of output, the price falls by enough to cause the firm’s total revenue to decline, even though the firm is selling more units o Profit Maximization Suppose the firm is producing at a low level of output Marginal cost is less than marginal revenue Firm increased production by 1 unit, additional revenue exceeds additional costs, and profit would rise Marginal cost is less than marginal revenue, firm can increase profit by producing more units At high levels of Q, where MC> MR reduced production costs saved exceed revenue lost raise profits by reducing production Firm adjusts its level of production until the quantity reaches point at which marginal revenue equals marginal cost The monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal cost curve The marginal revenue of a competitive firm equals its price, the marginal revenue of a monopoly is less than its price Competitive Firm: P = MR =MC Monopoly Firm: P > MR = MC After the monopoly firm chooses the quantity of output that equates marginal revenue and marginal cost, it uses the demand curve to find the highest price it can charge and sell that quantity In competitive markets, price equals marginal cost In monopolized markets, price exceeds marginal cost o A monopoly’s Profit Profit = (p-ATC) x Q Heigh of the box (P – ATC) Width of box is Q Area of the box (P-ATC) x Q is monopoly firm’s total profit When patent on a drug expires, other companies quickly enter and begin selling generic products that are chemically identical to the former
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