ECON 208 Chapter Notes - Chapter 10: Efficient-Market Hypothesis, Electric Power Transmission, Transact

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Published on 16 Apr 2013
School
McGill University
Department
Economics (Arts)
Course
ECON 208
1
Chapter 10 Monopoly, Cartels, and Price Discrimination
10.1 A Single-Price Monopolist
Revenue Concepts for a Monopolist
Everything in chapter 7 = applies to all market structures
Monopolist is a sole producer of the product that it sells, so the demand curve it faces is the
market demand curve for that product, which dhows the total quantity that buyers want to
purchase at each price and the quantity that the monopolist will be able to sell at each price
Unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand curve
Sales can be increased only if price is reduced, and price can be ^ only if sales are reduced
Average Revenue
TR = p x Q when the monopolist charges the same price for all units sold
AR = TR/Q = (p x Q)/Q = p average revenue
Since the demand curve shows the price of the product, the D curve = the avg revenue curve
Marginal Revenue
The revenue resulting from the sale of one more unit of the product
Since vely sloped, monopolist must reduce price it charges on all units to sell an extra unit. BUT
by reducing the price on all previous units, the firm loses some revenue, so the price received
for the extra unit sold is not the firms MR. MR = price lost revenue.
The monopolist’s marginal revenue is less than the price at which it sells its output. Thus the
monopolist’s MR curve is below its demand curve
As price declines, the quantity sold ^, MR = ΔTR/ΔQ
Two opposing forces that are present whenever the monopolist considers changing its price:
o Reduction in price units that the firm is already selling bring in less money at the new
lower price than at the original higher price = (loss in revenue = amount of price
reduction x number of units already being sold)
o New units are sold, which adds to revenue = (gain in revenue = number of new units
sold x price at which they’re sold)
o Net change in total revenues is the difference between these two amounts
MR is always <price for monopolist (contrast with perfect competition); in perfect competition,
firms MR from selling an extra unit of output = price at which that unit is sold; the perfectly
competitive firm is a price taker; it can sell all it wants at the given market price. The monopolist
faces a vely sloped demand curve, it must reduce the market price to increase its sales.
TR rises (MR is +ve) as price falls, reaching max when MR=0. As price continues to fall, TR falls,
MR is ve.
Demand is elastic (ɳ>1) when MR is +ve and inelastic (ɳ<1) when MR is ve. ɳ declines as go
down the D curve. A profit-maximizing monopolist will always produce on the elastic portion of
its D curve, where MR is +ve
Short-Run Profit Maximization
Rule 1: The firm shouldn’t produce at all unless price (average revenue) exceeds average
variable cost (p>AVC)
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Rule 2: If the firm does produce, it should produce a level of output such that marginal revenue
equals marginal cost (MR = MC = profit maximizing level)
Monopolist MR=MC = determines the firms profit-maximizing quantity; but the price charged
to consumers is then determined by the D curve
Even when the firm is choosing its quantity to maximize its profits, the size of those profits
depends on the position of the ATC curve. so can earn ve or 0 profits
Nothing guarantees that a monopolist will make positive profits in the short run, but if it suffers
persistent losses, it will eventually go out of business.
No Supply Curve for a Monopolist
In perfect competiton, each firm is a price taker and its supply curve is given by its own MC
curve. there is a unique relationship between market price and quantity supplied by any single
firm: an increase in the market price leads to an increase in quantity supplied. (NOT IN MONOP)
A monopolist does not have a supply curve because it is not a price taker; it chooses its profit-
maximizing price-quantity combination from among the possible combinations on the market
demand curve.
Monopolist has a marginal cost curve, but it doesn’t face a given market price. It chooses the
price-quantity combo on the market demand curve that maximizes its profits.
Firm and Industry
The monopolist is the industry.
SR profit-maximizing positiong of the firm is the SR eq. of the industry
Competition and Monopoly Compared (230)
Perfectly competitive industry, eq. determined by intersection of industry demand and supply
curves (supply curves = the sum of the individual firms’ marginal cost curves, therefore, eq.
output is price = marginal cost)
Monopolist, eq. output is such that price>marginal cost. The gap between price and marginal
cost implies the level of output in a monopolized industry is < the level of output that would be
produced if the industry were instead made up of many price-taking firms (with the same cost
structure)
A perfectly competitive industry produces a level of output such that price equals marginal cost.
A monopolist produces a lower level of output, with price exceeding marginal cost.
Market efficiency: amount of economic surplus generated in the market
monopolist decisions are profitable for the firm by lead to an inefficient outcome for society as a
whole; since price> marginal cost, greater benefit for society if more units of the good were
produced since the marginal value to society of extra units (as reflected by price) exceeds the
marginal cost of producing the extra units. More economic surplus if monopolist ^ outputs; but
the profit-maximizing decision to restrict output below the competitive level creates a loss of
economic surplus for society (deadweight loss) = market unefficiency
A monopolist restricts output below the competitive level and thus reduces the amount of
economic surplus generated in the market. The monopolist therefore creates an inefficient
market outcome.
Entry Barriers and Long-Run Equilibrium
If monopoly is suffering losses in SR, it will continue to operate as long as it can cover its variable
costs. In LR, it will leave the industry unless it can find a scale of operations at which its full
opportunity costs can be covered.
If monopoly profits are to persist in the long run, the entry of new firms into the industry must
prevented; if new firms enter in order to earn more than the opportunity cost of their capital,
the firm is no longer a monopoly. The former monopolist will now have to compete with the
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Document Summary

Everything in chapter 7 = applies to all market structures. Unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand curve. Sales can be increased only if price is reduced, and price can be ^ only if sales are reduced. Tr = p x q when the monopolist charges the same price for all units sold. Ar = tr/q = (p x q)/q = p average revenue. Since the demand curve shows the price of the product, the d curve = the avg revenue curve. The revenue resulting from the sale of one more unit of the product. Since vely sloped, monopolist must reduce price it charges on all units to sell an extra unit. But by reducing the price on all previous units, the firm loses some revenue, so the price received for the extra unit sold is not the firms mr. mr = price lost revenue.

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