# Today by ewghwehws

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```									Today
   Begin Monopoly
Monopoly
Chapter 22
Four Basic Models
Profit-Maximizing
Monopolist
   Suppose only one seller in the market.
   For now, assume it sells all its output at
the same price (no price discrimination).
   Choose Q to maximize:
   profits = TR - TFC - TVC.
   TFC do not depend on output, so
maximize TR - TVC.
Marginal Revenue
 Recall: for the price-taking firm, MR
= P.
 But: the monopolist faces the
market demand curve. As he sells
more, he moves down the D curve
and price falls.
Graph of Marginal Revenue
P                                 What is the MR of the 4th
unit?
How does that compare to
price?
10
Lost 3
9                            Will it ever be possible to
Gained 9

D   gain the price as MR?

3 4         Q
Monopolist’s Marginal
Revenue
P                  The monopolist’s
marginal revenue (MR)
curve lies everywhere
below the demand
curve.
MR < P.
D
MR
Q
Special Case: Straight-Line
Demand
P                     The MR curve for a
straight-line D curve lies
1/2-way between the D
curve and the vertical
axis.

MR   D
5     10   Q
Special Case: Straight-Line
Demand
P                         Recall: Price elasticity
falls as we move down
the straight-line D curve.

=1            Total revenue rises then
falls as we move down
the straight-line the D
curve.
MR       D
Q
When  = 1, revenue is
5         10
at its maximum. That’s
when MR = 0.
Choosing Quantity
   Maximize TR - TVC
 TR is area under the MR curve.
 TVC is area under the MC curve.

 Therefore maximize the difference.
Choosing Quantity
P     TR - TVC            Profits are maximized
when MR = MC.
MC

MR       D
Q
Monopolist’s Profit-
Maximizing Rule
P                              Choose Q where MR =
MC, charge the highest
MC       price possible.
p*
Check:
In SR, is P  AVC?
In LR, is P  ATC?
MR   D
Q*             Q
Monopolist’s Profit-
Maximizing Rule
P                                Will this monopolist
produce in the LR?
MC
In the SR?
p*
ATC       Can you identify profits
or losses?

MR   D
Q*               Q
Monopolist’s Profits
P

MC
p*
ATC

MR   D
Q*               Q
The Monopolist & A Supply
Curve
   A monopolist does not have a supply
curve!
   He chooses his best price & quantity
combination on the market demand
curve.
   He is not a price taker, so the concept of
a supply curve doesn’t make sense.
   He is a price maker.
The Monopolist and
Efficiency
 Productive efficiency: Some have
argued that a monopolist may get
“lazy” and not keep costs at a
minimum.
 Others argue that if it’s goal is to
maximize profits, that will be
incentive enough to minimize costs.
 This issue remains unsettled.
The Monopolist and
Efficiency
   Allocative efficiency: Look at the
sum of producers’ and consumers’
surpluses.
Consumers’ Surplus
P                             CS: the area under
MC
the demand curve but
above price.
p*

MR   D
Q*             Q
Producers’ Surplus
P                             PS = TR - TVC
MC       PS: the area under
p*                        price but above MC.

MR   D
Q*             Q
Sum of Producers’ and
Consumers’ Surplus
P                             Does the monopolist
MC
produce the quantity
that is allocatively
p*
efficient?

MR   D
Q*             Q
The Allocatively Efficient
Quantity
P                            More PS & CS could
be gained by
MC
producing QE.
PM
The marginal
benefits of the add’l
units are more than
D       their marginal costs.
QM QE        Q
Efficiency of Monopolist
 If the monopolist were to produce &
sell the efficient quantity, he would
have to set a lower price.
 We say the monopolist reduces
output and raises price compared to
the efficient solution.
 This causes a deadweight loss of
producer’s & consumers’ surplus.
Deadweight Loss of CS & PS
P                            Represents the cost to
society of not
MC
producing the
PM                       efficient quantity of
this good.

D
QM QE        Q
Effects of Monopolies
 Produce less than the efficient
quantity.
 Charge higher prices as a result.
 Consumers are hurt on both counts.
Coming Up:
 Barriers to entry & the monopolist.
 More price discrimination
Group Work
   Try to complete the exercise without
looking back at your notes.
   Identify on the graph for a Monopolist
   the profit-maximizing level of output.
   the price that the monopolist will charge
(assuming he charges a single price for all
units).
   the total profits or losses of the monopolist
More things to identify
 consumer’s surplus
 producer’s surplus
 the allocatively efficient quantity
 the deadweight loss associated with
having a monopoly in this market
 the supply curve
Monopolist’s situation
\$/q
Price

50

40
MC
ATC
30

20

10

5

0
0   1   2   3   4    5    6     7   8   9     10
Quantity
MR                  D

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