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Intermediate Economics Chapter Seventeen Notes

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University of Guelph
ECON 2310
Johanna Goertz

Chapter Seventeen 171174 176177 Monopoly y Market Power o A firm has market power when it can profitably charge a price that is above its marginal costo A company that faces no competitors at all can often charge a price that is substantially above marginal costo Significant market power exists in two types of markets A market with only one seller is called a monopoly market and the single seller in that market is called a monopolist A market with a few but not many sellers is called an oligopoly market Firms in those markets are known as oligopolistso In situations with market power we often must think of a single market as containing a number of different but closely related productso How Do Firms Become MonopolistsA firm achieves a monopoly position not through a government award but because no other firm finds the market profitable When a potential foresees a profit that is less than the cost of entry into the market a firm can become a monopolist by default In extreme cases economies of scale imply that it is impossible for more than one firm to make a positive profity Monopoly Pricing o Marginal Revenue for a MonopolistA firms marginal revenue captures the additional revenue it gets from the marginal units it sells measured on a per unit basis For a firms selling Q units this change in revenue R is composed of two effects The extra Q sales at price PQ contribute additional revenue of PQ X Q equals to the area of the green shaded rectangle in the figure pg620 This is the output expression effect If it were the only effect marginal revenue would simply equal RQ PQ X QQ PQ the price the firm receives for each of these marginal units The second effect the price reduction effect reduces marginal revenue below this level To sell the Q marginal units the firm must reduce its price from PQQThe resulting price change is P PQPQQ a negative number whose magnitude equals the height of the yellow rectangle The overall change in revenue equals the sum of the output expansion and price reduction effects R PQ X QP X Q Q Which then we can use to write marginal revenuePQ X QP X Q QMRRQQWhen the monopolists output is finely divisible QQ is approximately equal to Q so marginal revenue can be written simply as MR PQPQQ
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