C. Profit Maximization 1. The monopolist's profit-maximizing quantity of output occurs where marginal revenue is equal to marginal cost. a. If the firm's marginal revenue is greater than marginal cost, profit can be increased by raising the level of output. b. If the firm's marginal revenue is less than marginal cost, profit can be increased by lowering the level of output. 2. Even though MR= MCis the profit-maximizing rule for both competitive firms and monopolies, there is one important difference. a. In competitive firms, P= MR; at the profit-maximizing level of output, P= MC. b. In a monopoly, P> MR; at the profit-maximizing level of output, P> MC. 3.The monopolist's price is determined by the demand curve (which shows us the willingness to pay of consumers). Figure 15.3
4 D. FYI: Why a Monopoly Does Not Have a Supply Curve1. A supply curve tells us the quantity that a firm chooses to supply at any given price. 2. But a monopoly firm is a price maker; the firm sets the price at the same time it chooses the quantity to supply. 3. It is the market demand curve that tells us how much the monopolist will supply because the shape of the demand curve determines the shape of the marginal revenue curve (which in turn determines the profit-maximizing level of output). E. A Monopoly's Profit 1. Again, we can find profit using the following: Profit = TR–TC. 2. Because TR= Px Qand TC= ATCx Q, we can rewrite this equation: Profit = (P–ATC) x Q. Figure 15.4
IV. The Welfare Cost of Monopoly A. The Deadweight Loss 1. The socially efficient quantity of output is found where the demand curve and the marginal cost curve intersect. This is where total surplus is maximized. 2. Because the monopolist sets marginal revenue equal to marginal cost to determine its output level, it will produce less than the socially efficient quantity of output. 3. The marginal cost curve is horizontal and the drug industry is characterized by large fixed costs and constant production costs. 4. The price that a monopolist charges is also above marginal cost. Although some potential customers value the good at more than its marginal cost but less than the monopolist’s price, they do not purchase the good even though from a societal standpoint that is inefficient. Figure 15.5
6 5. The deadweight loss can be seen on the graph as the area between the demand and marginal cost curves for the units between the monopoly quantity and the efficient quantity. B. The Monopoly's Profit: A Social Cost? 1. Welfare in a market includes the welfare of both consumers and producers. 2. The transfer of surplus from consumers to producers is, therefore, not a social loss. 3. The deadweight loss from monopoly stems from the fact that monopolies produce less than the socially efficient level of output. 4. If the monopoly incurs costs to maintain (or create) its monopoly power, those costs would also be included in deadweight loss. V. Price Discrimination
You've reached the end of your free preview.
Want to read all 9 pages?