Econ – Nov 18
Today: Profit Maximization for the Monopolist, Economic waste of monopoly, policy
issues, price discrimination
Any firm maximizes profits at the Q where MR=MC.
The steps for finding the profit max position for the monopolist:
1 – Find the output where MR=MC. This output is the profit maximizing output. (Q*)
2 – At Q*, get the value of the price by going up to the demand curve. This price P*.
3 – At Q*, get the value of AVC and check the shut down rule: If P*AVC, the firm produces Q*.
4 – Find the ATC associated with Q*.
5 – Calculate the maximum profits. p*=(P* ATC)Q*
From this process, we get the quantity (Q*) that the monopolist produces, the price (P*)
that they charge and their maximum profit (p*).
Long Run Equilibrium in a Monopoly = Short Run Equilibrium in a Monopoly
(If p are +ve, and its entry barriers work, they will continue to make +ve p.)
Joseph Schumpeter – thought monopolies were a good thing: (9/10 economists don’t
agree with this)
Entry Barriers are not a problem. They can be circumvented by technological
“Monopoly is the most powerful engine of progress.” Because monopoly profits induce
‘Creative Destruction’ – create a new market and destroy the old market (oxymoron)
Economic Wastes of Monopoly:
1 – Deadweight Loss (Harberger)
The loss in allocative efficiency caused by the monopolist producing less than the
socially efficient level (competitive level). From perfect competition to
monopoly, deadweight loss is the loss of consumer surplus and producer surplus