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```					Monopoly

Part 1
Review
What are the characteristics:
– Single seller
– No close substitutes
– Price maker
– Block entry
– Some non-price competition
These things make it expensive and nearly
impossible for new businesses to succeed
– Especially “economies of scale”
Economies of Scale & Monopolies
Remember the EOS is the idea that some large
costs associated with an industry have less
effect if you can produce a large number of
items.
Thus, if we have to split the number of items
being made between 2 or more firms, we defeat
the benefit of an EOS.
This can be seen in the Long Run ATC graph
(page 425).
– If the Long Run ATC curve is declining, we have a
“natural monopoly”.
PC vs Monopoly: Demand
In Perfect Competition, the Market
Demand curve looked like what?
In Perfect Competition, the Individual
Firm’s Demand curve looked like what?
In a Monopoly, the Market Demand curve
will always be downward sloping.
In a Monopoly, the Individual Firm’s
Demand curve will always be what?
– Identical to the Market Demand
– Why?
PC vs Monopoly: Marginal Revenue
In Perfect Competition, marginal revenue
is always equal to price
– Because MR = D = AR = P
Because the demand line is horizontal (perfectly
elastic)
In a Monopoly, marginal revenue is always
less than price (MR < P)
– For regular demand in order for the quantity
demanded to increase you have to do what?
Lower price
PC vs Monopoly: Marginal Revenue
So, while lowering price may allow you to
increase Q sold. It means you have to
accept less money for ALL UNITS sold.
Said differently – Let’s say that a business
sells widgets for \$10 each and wants to
increase sales from 5 units to 6 units.
– In Perfect Competition what does it do?
Just produces another unit and it will get bought.
– In PC how does this affect TR?
It goes up \$10
PC vs Monopoly: Marginal Revenue
Using the same scenario (A business sells
widgets for \$10 each and wants to increase
sales from 5 units to 6 units.)
– In a Monopoly what does the business do?
It must lower prices to increase sales.
Let’s say that the business lowers the price to \$9 to get the
6th unit sold
– In a Monopoly how does this affect TR?
It goes up \$4
Yes, the business made \$9 on the 6th unit. But it also lost \$1
on the first 5 units.
Said differently
– \$10 x 5 = \$50
– \$9 x 6 = \$54
Graphs (YIPPEE!)
Page 428 has a graph of a typical D curve and
MR curve for a monopoly.
– Mr. Baumann will also draw it on the board.
Note that we can also see the points at which
demand is elastic and inelastic.
The lower graph shows the TR curve.
– Note how it shows us where TR is maximize.
– Having now seen it. If I just gave you the top graph,
how would you tell me where TR is maximized?
– TR is Max where MR = 0
(Sound a lot like the MR=MC rule to me)

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 views: 5 posted: 3/3/2012 language: pages: 8