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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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posted:3/3/2012
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