ECON 10a Lecture Notes - Lecture 15: Marginal Revenue, Demand Curve, Economic Surplus

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Econ 10a Ch. 15: Monopoly
Monopoly
1. Demand Curve for a Monopoly
a. Market demand curve is the demand curve faced by the monopoly
b. For the first unit, marginal revenue is equivalent to price. However, after the first
unit marginal revenue is lower than price
c. The MR formula (Non-discriminator)
i. MR of Qb = Rb - Ra
ii. MR = (New P) - (Change in P)(Firm’s Original Quantity)
iii. Or MR = (P1) - (P-P1)(Q)
d. Special Case: Linear Demand Curve
i. MR is twice as steep as the Demand Curve
ii. Or, MR falls twice as fast as price if the Demand Curve is a straight line
e. Monopoly Profit-Maximization
i. Profit goes up whenever Marginal Revenue is higher than Marginal Cost.
Profit starts go down at the intersection
ii. To maximize profit, firms should produce the Q where MR = MC. This is
the quantity the Monopoly wants to sell
iii. To find the price the monopoly should set, the monopoly looks at the
demand curve and finds the price at Q where MR = MC.
f. Two Additional Points
i. Monopolies do not have a supply curve
1. Monopolies do not respond to price, but instead maximizes its
profit by picking a point on its own demand curve that maximizes
profit
ii. In the short-run, the monopolist may not be making a positive profit
1. Profit may be negative, positive, or zero
2. Profit instead, depends on the ATC
3. In the long-run, monopolists will have a profit that is greater than
or equal to zero
a. Monopolists will not have a long-run negative profit
because there is no barrier to exit
g. Inefficiency of Monopoly
i. Assuming no externalities, the socially efficient quantity is where MC, or
MSC meets D, or MSB
ii. However, a monopoly will never meet the socially efficient quantity
because the monopoly will always follow the intersection of MR and MC.
MR will always be less than the Demand Curve
iii. Monopolies will always produce too little
1. There is a deadweight loss due to monopoly
2. The total value to buyers is everything under the Demand Curve
up to the efficient quantity
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Document Summary

Monopoly: demand curve for a monopoly, market demand curve is the demand curve faced by the monopoly, for the first unit, marginal revenue is equivalent to price. Profit goes up whenever marginal revenue is higher than marginal cost. To maximize profit, firms should produce the q where mr = mc. This is the quantity the monopoly wants to sell. Assuming no externalities, the socially efficient quantity is where mc, or. Msc meets d, or msb: however, a monopoly will never meet the socially efficient quantity because the monopoly will always follow the intersection of mr and mc. Antitrust policy: in history, monopolies have been broken up into smaller companies, ex: us steel, bell company, depends on current government/politicians in power. Lower trade barriers: force domestic firms to compete with foreign firms. Ex: economies of scale that never stop, ac is constantly falling but never goes below .

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