ECON 208 Lecture 17: Chapters 10 and 11

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ECON208Lecture17Chapters10and11
10.1ASinglePriceMonopolist
RevenueConceptsofaMonopolist
Amonopolistfacesadownwardslopingdemandcurve.
→ifthemonopolistchargesthesamepriceforallunitssold,itstotalrevenue(TR)is:
TR=pxQ
→Averagerevenue(AR)istotalrevenuedividedbyquantity:
AR=TR/Q=(pxQ)/Q=p
→Marginalrevenue(MR)istherevenueresultingfromthesaleofanadditionalunitof
production:
MR=ChangeinTR/changeinQ
Themonopolistmustreducethepricetoincreaseitssales–thereforetheMRcurve
isbelowthedemandcurve
ShortRunProfitMaximization
TheprofitmaximizinglevelofoutputiswhereMC=MR
Aprofitmaximizinghasp>MC
Thesizeoffixedcostsdeterminewhetheramonopolistearnspositiveeconomicprofits
→Unlikeacompetitivefirm,themonopolistdoesnothaveasupplycurvebecauseitchooses
itsprice
→Canwecomparethemonopolyoutcometothecompetitiveoutcome?
InaperfectlycompetitiveindustrypriceequalsMC.Butamonopolistproducesata
lowerlevelofoutput,withapriceexceedingMC.
TheInefficiencyofMonopoly
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EntryBarriersandLongRunEquilibrium
→Despiteincentivestoenter,effectiveentrybarriersallowmonopolyprofitstopersistinthe
longrun
→Entrybarriersareoftwotypes:
“Natural”–suchaseconomiesofscale
“Created”–byadvertisingcampaigns,or
 Bygovernmentregulation
TheVeryLongRunandCreativeDestruction
→Intheverylongrun,technologicalchangesandinnovationscancircumventeffectiveentry
barriers
→JosephSchumpeterdefendedmonopolyonthebasisthatthepursuitofmonopolyprofits
providesincentivetoinnovate
→Schumpetercalledthereplacementofonemonopolistbyanotherthroughinnovationthe
processofcreativedestruction
10.2CartelsasMonopolies
→Severalformsinanindustrymayformacarteltomaximizejointprofits
TheEffectsofCartelization
Cartelizationwillreduceoutputandraisepricefromtheperfectlycompetitivelevels
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