–Each firm faces a horizontal demand •Monopoly firm –Price maker, sets the price by choosing output level –Faces the downward-slopingdemand curve for the entire industry
Comparing Demand Curves
Profit Maximizing Rule for Monopoly•Similarity between monopoly and competitive firms –Profit is maximized at output level (Q) where MR = MC •Difference between monopoly and competitive firms –In competition, P = MR –In monopoly, P > MR –To increase output, monopoly must lower the price. Competitive firms can sell as much as they want at the market price.
Monopoly Marginal Revenue•When the monopoly decreases its price in order to sell more output units, two things happen: –The price effect •All units are now sold at a lower price. By itself, this is a lossfor the firm.–The output effect •More units are sold. By itself, this is a gainfor the firm.
Monopoly Marginal RevenueQuantity of Customers (Q)Price (P)Total Revenue (TR) = Q ×PMarginal Revenue per 1,000 Customers (MR) = ΔTR 0$100$0.001,0009090,000$90,0002,00080160,00070,0003,00070210,00050,0004,00060240,00030,0005,00050250,00010,0006,00040240,000-10,0007,00030210,000-30,0008,00020160,000-50,0009,0001090,000-70,00010,00000.00-90,000Notice the inverse relationship between output (quantity) and price since the monopolist faces a downward-sloping demand curve.
Monopoly MR and Demand
Understanding Monopoly: How Much Do Monopolies Produce? 10
Deciding How Much to Produce•For a monopoly, we can use the same three-step process to determine profits that we used for a competitive firm: 1. Find the profit maximizing point: MR = MC 2. Find output (Q) at this point: move down the vertical dashed line to the x axis at point q 3. The monopolist will charge a price P equal to the height of the demand curve at that quantity. The average costs will be the height of the ATC curve at that quantity. Average profit per unit is (P – ATC).
The Monopolist’s Profit
Contrasting Competition and Monopoly Competitive Markets Monopoly Many firms
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