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   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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posted:9/3/2012
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