For ex if the curve is very flat then the monopolist

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For ex: if the curve is very flat, then the monopolist can sell an additional unit with only a small price cut and will therefore not have to lower the price on units he otherwise sold by very much MR will be close to the price per unit If the demand curve is a straight line then the dependence of the monopolist’s total sales on the price it charges can be represented by the equation: Q = A – B x P; Q = number of units firm sells, P = price it charges per unit A and B are both constants MR = P – Q/B P – MR = Q/B
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o This reveals that the gap b/w price and MR depends on the initial sales Q of the firm and the slope parameter B of its demand curve o If Q is higher, then MR is lower b/c the decrease in price required to sell a greater quantity costs the firm more o Greater B is, the more sales fall for any given increase in price and the closer MR is to the price of the good Average and Marginal Costs AC of production = total cost/output Downward slope = assumption that there are economies of scale larger the firm’s output is, the lower are its cost per unit When AC is a decreasing function of output, MC is always less than the AC MC lies below AC Formula that relates AC and MC: C = F + c x Q; F= fixed costs that is independent of the firm’s output, c= MC AC = C/Q = F/Q + c o AC declines as Q increases b/c the fixed cost is spread over a larger output Profit-maximizing output of a monopolist is that at which MR = MC When P > AC, the monopolist is earning some monopoly profits Monopolistic Competition In monopolistic competition models two keys assumptions are made to get around the problem of interdependence Interdependence: considering the responses of both consumers and competitors to a change in price (1) each firm is assumed to be able to differentiate its products (2) Each firm is assumed to take the prices charged by its rivals as given – that is it ignores the impact of its own price on the prices of other firms Assumptions of the Model A firm is expected to sell more the larger the total demand for its industry’s product and the higher the prices charged by its rivals However, we expect the firm to sell less the greater the number of firms in the industry and the higher its own price
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Equation for the demand for a firm with these two properties: Q = S x [1/n – b X (P – P)]; Q = firms sales, S = total sales of the industry, n = # of firms in the industry, P(bar) = avg price charged by its competitors b = constant term representing the responsiveness of a firm’s sales to its price o If all firms charge the same price, each will have a market share 1/n o A firm charging more than the avg of other firms will have a smaller market share, a firm charging less a larger share o Also assume that S is unaffected by P assume that firms can gain customers only at each other’s expense Market Equilibrium Also assume that all firms in this industry are symmetric, that is, the demand function and cost function are identical for all firms
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