EDU ECO2003 Brief summary Revision.pptx

# 40 monopoly characteristics of a monopoly one firm no

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Monopoly Characteristics of a Monopoly One firm, no close substitutes for the product, Barriers to entry. Monopolist is the only firm, therefore, no distinction between the market demand curve and the demand curve facing a single firm. How can monopolist sell more? By lowering prices!! The effect of being able to lower the price is shown below. Notice That AR=P=D, but… notice that MR is less P Q TR MR AR 8 1 8 8 8 7 2 14 6 7 6 3 18 4 6 5 4 20 2 5 4 5 20 0 4
The profit-maximising monopolist As usual, we assume that the objective for the firm is to maximise profits . This assumption is still pretty reasonable, because firms want to make as much profit as possible. Remember our profit-maximising condition that we derived in the previous chapter: MR=MC The difference is now that MR is no longer equal to price because the monopolist has power over the price. 42

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Notice that MR and AR both decline Most importantly MR is lower than AR when the demand curve slopes downward P Q TR MR AR 8 1 8 8 8 7 2 14 6 7 6 3 18 4 6 5 4 20 2 5 4 5 20 0 4 Monopoly
If AR is a striaght line, MR lies halfway between the price axis and AR curve P = a – bQ TR = aQ – bQ 2 MR = dTR/dQ = a – 2bQ P Q TR MR AR 8 1 8 8 8 7 2 14 6 7 6 3 18 4 6 5 4 20 2 5 4 5 20 0 4 Monopoly

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Monopoly If profit maximizing Look for where MR=MC MR = MC at E Therefore produce Q 1 But Monopoly will charge price P 1 according to Demand curve (Why? Because that says how much consumer is
Monopoly vs Perfect Competition Perfect Market D=P=AR=MR (Blue line) Equilibrium at P c Q c Monopoly MR is below Equilibrium at P M Q M

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Monopoly vs Perfect Competition Perfect Market D=P=AR=MR (Blue line) Equilibrium at P c Q c Monopoly MR is below Equilibrium at P M Q M Therefore Monopolist Charges higher price and Produces lower quantity Deadweight loss “B+C” “A” represents the amount of consumer surplus that has been taken away by the monopolist
Monopoly, Elasticity, Revenue Q=5 Elasticity and the curves MR < P = demand curve = AR When elasticity is high, MR > 0. When elasticity is low, MR < 0. (The monopolistic firm would never sell on the elastic portion of the demand curve.) When elasticity is 1, MR = 0. With reference to the to the lef. Between Q=0 and Q=5, we are on the elastic portion of demand curve. MR is positive, TR is increasing. At Q=5 , MR=0 , TR is maximized 0

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Marginal Revenue and Elasticity Given the way we drew our MR curve on the previous slide, we see that MR>0 when we operate on the elastic part of our demand curve . Similarly, MR<0 when we operate on the inelastic portion of our demand curve . And when the demand curve is unitary elastic (in the middle of the demand curve), MR=0. This tells us that a monopolist will never operate on the inelastic portion of their demand curve; why do you think this is? 49 P Q MR curve q q/2
Price discrimination The diagram here shows how price discrimination affects Consumer Surplus and Producer Surplus Perfect price discrimination occurs whereby the producer is able to charge each consumer the maximum price he is willing to pay. All CS is extracted; total surplus is maximised, but it comprises only of producer surplus (as CS = 0); there is no deadweight loss.

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Price discrimination Perfect price discrimination occurs whereby the producer is able to charge each consumer the maximum price he is willing to pay.
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