Competitive Firm: P = MR = MC Monopoly Firm: P > MR = MC ● Profit maximizing price is based on the Demand Curve. because the demand Curve relates the amount that customers are willing to pay to the quantity sold. ● The Demand Curve help find the highest price it can charge for that quantity (Point B). Monopoly Profit To see a monopoly’s firm’s profit: Profit = TR - TC or Profit = (TR/Q - TC/Q) x Q TR/Q is equal to P price, and TC/Q is ATC, average total cost→ Profit = (Price - ATC) x Q The Monopolist’s Profit pg. 309 [Figure. 5] The area of the box BCDE equals the profit of the monopoly firm. The height of the box (BC is price minus average total cost, which equals profit per unit sold. The width of the box (DC) is the number of units sold. ● segment BC, is price minus average total cost (P - ATC) in the shaded box, which is the profit on the typical unit sold. ● Segment DC is the quantity sold, Qmax. Therefore the area of this box is the monopoly firm’s total profit. The Market for Drugs pg. 310
[Figure. 6] When a patent gives a firm a monopoly over the sale of a drug, the firm charges the monopoly price, which is well above the marginal cost of making the drug. When the patent on a drug runs out or expires, new firms enter the market. making it more competitive. As a result, the price falls from the monopoly price to marginal cost. Welfare Cost of Monopolies The Deadweight Loss ● The socially efficient quantity is found where the demand curve and the marginal-cost curve intersect. The Efficient Level of Output pg. 311 [Figure. 7] a benevolent social planner who wanted to maximize total surplus in the market would choose the level of output where the demand curve and marginal-cost curve intersect. Below this level, buyer (as reflected in the demand curve) exceeds the marginal cost of making the good. Above this level, the value to the marginal buyer is less that marginal cost. The Inefficiency of Monopoly pg. 312
[Figure. 8] because a monopoly charges a price above marginal cost, not all consumers who value the good at more than its cost buy it. Thus, the quantity produced and sold by a monopoly is below the socially efficient level. The deadweight loss is represented by the area of the triangle between the demand curve (which reflects the value of the good to consumers) and the marginal-cost curve (which reflects the costs of the monopoly producer). ● because the demand curve reflects the value to consumer, and the marginal-cost curve reflects the costs to the monopoly producer, the area of the deadweight loss triangle between the demand curve and the marginal-cost curve equals the total surplus lost. ● deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax. Price Discrimination Price discrimination: the business practice of selling the same good at different prices to different customers.
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