ECON 202 Lecture Notes - Lecture 13: Marginal Revenue, Natural Monopoly, Market Power

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16 Feb 2017
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Monopoly: a firm that is the only producer of a good that has no close substitutes. The ability of a monopolist to raise its price above the competitive level by reducing output is known as a market power. Profits ca(cid:374)"t persist i(cid:374) the lo(cid:374)g ru(cid:374) u(cid:374)less there is the barrier to entry: Due to the price effect of an increase in output: The marginal revenue curve of a firm with market power always lies below its demand curve. Due to the price effect of an increase in output: the marginal revenue curve of a firm with a market power always lies below its demand curve. To maximize profit, the monopolist chooses quantity at which mr=mc: but marginal revenue does not = price anymore (as it did in perfect competition). The rule applies to firms in both forms of competition (mr=mc). P=mc determines the perfectly co(cid:373)petitive fir(cid:373)"s profit-maximizing quantity of output. P>mr=mc determines the (cid:373)o(cid:374)opolist"s profit-maximizing quantity of output.

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