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University of Hawai‘i at MānoaDepartment of Economics
ECON 130 (003): Principles of Economics (Micro)
http://www2.hawaii.edu/~lindoj
Gerard Russo
Lecture #23
Tuesday, April 6, 2004
ANNOUNCEMENTSLAST LECTURETuesday, May 4, 2004, 12:00-1:15 PM,
BIL 152
Review SessionThursday, May 6, 4:30-5:30 PM, BIL 152
FINAL EXAMINATION Thursday, May 13, 2004, 12:00-2:00 PM,
BIL 152
LECTURE 23Monopoly
Welfare Implications of Monopoly Pricing
MONOPOLYMonopolyOne FirmPrice MakerHomogeneous ProductNo Entry
The Monopolist’s DemandAverage RevenueTotal RevenueMarginal Revenue
Monopoly Profit Maximization
Marginal Revenue=Marginal Cost
MR=MC
Monopoly Revenue
Inverse Demand: P=a – bQ
Price=Average RevenueP=AR, Rule of one price.
AR=P=a – bQ
Total Revenue=TR=PQ=aQ – bQ2
Marginal Revenue=MR=a – 2bQ
$/Q
Q
Q0
0
$
Inverse Demand:AR=P=a-bQ
TR=aQ-bQ2
MR=a-2bQ
$/Q
Q
Q0
0
$
Inverse Demand:AR=P=a-bQ
TR=aQ-bQ2
MR=a-2bQ
elasticity = -1
elasticity = - infinity
elasticity = 0
$/Q
Q
MC ATC
AVCP0•
0
b•
a•
• f
• j
• g
Q0
• h
Profit Maximizing Monopolist (non-discriminating)
c•
Marginal Revenue
Demand
Total revenue equals the area of rectangle 0P0fQ0.Total cost equals the area of rectangle 0cgQ0.Profit equals the area of rectangle cP0fg.
$/Q
Q
MC ATC
AVCP0•
0
b•
a•
• f
• j
• g
Q0
• h
Are Economic Profits Positive, Negative or Zero?Shut-Down or Continue to Operate?
c•
D
MR
$/Q
Q
MCATC
AVC
0
Are Economic Profits Positive, Negative or Zero?Shut-Down or Continue to Operate?
D
MR
$/Q
Q
LRS
0
D
Competition
PC
QC
A
B
Gross Social Benefits = A + BSocial Cost = BNet Social Benefits = A
$/Q
QMR
LRS:LMC=LATC
0D
Competition
PC
QC
Gross Social Benefits = A+B+E+F+G+H+J+KSocial Cost = H+J+KNet Social Benefits = A+B+E+F+G
PM
QM
A B
EF
G
HJ K
$/Q
QMR
LRS:LMC=LATC
0D
CompetitionGross Social Benefits = A+B+E+F+G+H+J+KSocial Cost = H+J+KNet Social Benefits = A+B+E+F+G
PC
QC
PM
QM
A B
EF
G
HJ K
MonopolyGross Social Benefits = A+B+E+F+HSocial Cost = HNet Social Benefits = A+B+E+F