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ECO100 - NOV 7 Monopoly profit maximizing, contrived scarcity

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University of Toronto St. George
James Pesando

2. Marginal Revenue (MR) < Price (P) Microsoft Windows ● 90% of market for operating systems of personal computers <=> near monopoly x ○ Demand curve facing a monopolist vs demand curve facing a perfectly competitive firm ○ Monopolist: single seller of a product, no close substitutes ○ Downward sloping market demand curve is also the monopolist demand curve. ○ To sell an additional unit of output, monopolist must lower price ■ Additional revenue(MR) is strictly less than the price ○ Perfectly competitive firm, so small to the market relative as a whole, can sell an additional unit of output at unchanged price. ○ Marginal revenue is very different for monopolist and competitive firm ■ MR = P You own highway 407 (toll road, monopoly) ● What output Q (number of cars that use highway) will maximize your profits? ● Important insights: ○ 1) MR Where MR = MC ■ At Q1, MR > MC => expand ■ At Q2, MR < MC => contract output ○ 2. To sell Qm, monopolist must charge price Pm Why is there no supply curve? ○ Monopolist produces profit-maximizing output (Qm), there is only one level of output. ○ At Qm, there is only one price (Pm) at which demand equal to Qm. ■ When you choose output, you are simultaneously choosing the price ○ Remember: supply curve answer the question: ■ If the price is X, the quantity supplied will be Y. ● Irrelevant for the monopolist. 3. Economic Profit of M
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