Monopoly. Monopoly Opposite of PC Occurs when output of entire industry is produced and sold by a...
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Transcript of Monopoly. Monopoly Opposite of PC Occurs when output of entire industry is produced and sold by a...
MonopolyOpposite of PCOccurs when output of entire
industry is produced and sold by a single firm referred to as Monopolist
Characteristics of Pure Monopoly
Single supplier – the firm and the industry are the same.
No close substitutes – the product is unique and unlike any others.
Price maker – the firm has considerable control over price since it controls the total quantity supplied.
Blocked entry – barriers to entry exist because there is no immediate competition.
Example railways in Pakistan , PTCL was once a monopoly
Barriers to EntryEconomies of ScaleLegal Barriers to Entry
◦Patents[ gives right to a firm to produce a product for a given time period]
◦Licenses[ govt gives licenses e.g. TV channels]
Ownership or Control of Essential Resources [e.g. gas reserves]
Price Maker
Monopoly Price-Setting Strategies◦ For a monopoly firm to determine the quantity
it sells, it must choose the appropriate price. ◦ There are two types of monopoly price-setting
strategies:◦ A single-price monopoly is a firm that must
sell each unit of its output for the same price to all its customers.
◦ Price discrimination is the practice of selling different units of a good or service for different prices.
A single price Monopolist
Cost and Demand curveThe cost curves[ AVC, ATC] of
monopolist are U shaped just like PC firms, because cost depend on law of DR not market structure
Monopoly firm is sole the supplier so it faces downward sloping demand, tradeoff between D and P
A single price MonopolistAverage RevenueWhen monopoly charges same price
over all units sold, AR is identical to price.
The market demand curve is also firm AR curve
AR= TR/Q= [P x Q]/Q so Q cancels out and
hence AR= P for single price monopoly
A single price MonopolistPrice and Marginal Revenue
◦MR from sale of additional unit of production will be below demand curve
◦Since the demand curve is negatively sloped hence the prices must be lowered on all units to sell an extra unit.
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
Gain = $132
Loss = $30
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
• $102 Becomes a Point on the MR Curve
• Try Other Prices toDetermine Other MR Points
Gain = $132
Loss = $30
The Constructed Marginal Revenue CurveMust Always Be Less Than the Price
MR
Total, Average and Marginal Revenue
PriceP=AR
Quantity Total RevenueTR= T x Q
Marginal Revenues
9.1 9 81.9
9 10 90 8.1
8.9 11 97.9 7.9
Price elasticity and MRAs noted earlier, since the
demand curve facing a monopoly firms is downward sloping, MR < P
MR > 0 when demand is elasticMR = 0 when demand is unit
elasticMR < 0 when demand is inelastic
$200
150
100
50
0
$750
500
250
0
2 4 6 8 10 12 14 16 18
2 4 6 8 10 12 14 16 18
Pri
ce
Tota
l R
even
ue
Monopoly Revenue and CostsDemand, Marginal Revenue, and Total Revenue for a
Pure MonopolistElastic Inelastic
Demand and Marginal Revenue Curves
Total-Revenue Curve
DMR
TR
SR Monopoly equilibrium Two rules apply 1. Produce or Not [ if monopolist
cannot cover SR variable costs then shut down]
2. If the firm does produce then MC = MR, the monopolist is maximizing profit.
MC= MRBecause MR< P for a monopoly
then MR=MC< PWhen monopoly firm is in profit
maximizing equilibrium ,its MC is always less than price it charges.
MR = MC Determines the Profit-Maximizing Output**Elasticity and revenues Monopolist always produce where
demand is elastic , MR is positiveA profit maximizing monopoly will
never sell in the range where demand is inelastic
Profit Maximization
0
$200
175
150
125
25
100
75
50Pri
ce,
Costs
, an
d R
even
ue
1 2 3 4 5 6 7 8 9 10
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Pm=$122
A=$94
EconomicProfit
Loss Minimization
0
Pri
ce,
Costs
, an
d R
even
ue
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
Economic Effects of MonopolyPrice, Output, and Efficiency
PurelyCompetitive
Market
PureMonopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure Competition is EfficientMonopoly Price is Greater Than MC
And Is Therefore Inefficient
a
b
c
Supply for monopolyWe are not equating p=MR= MC
like we did in PCFor a monopoly firm there is no
unique relationship between markept price and quantity supplied
Figure 13.5
Multi-plant monopolistHow to allocate production
between two or more plants?The given output will be allocated
where the MC of plants equatePlant A MC=20 producing 30unitsPlant B MC=17 producing 25
unitsCost reduce by 3 if you reallocate