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Chapter 10

Chapter 10- Monopoly, Cartel, and Price Discrimination.docx

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Kalina Staub

Chapter 10- Monopoly, Cartels, and Price Discrimination 10.1- A Single Price Monopolist  Monopoly- A market containing a single firm  Monopolist- A firm that is the only seller in a market Revenue Concepts for a Monopolist  Unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand curve  Sales are increased only if price is reduced and price is increased only if sales are reduced  Average Revenue  TR= P x Q AR= TR/Q = P and Demand curve= AR curve  Marginal Revenue  Because demand curve is negatively sloped, the monopolist must reduce the price that it charges on all units in order to sell an extra unit but this implies that price received for extra unit sold is not the firm’s marginal revenue because by reducing the price on all previous units, the firm loses some revenue  MR= P – lost revenue  MR is less than the price at which it sells its output because the price must be reduced on all units in order to sell an additional unit, thus the monopolist’s MR curve is below its demand curve  MR= Change TR/ Change Q  Reduction of price- loss in revenue is the amount of the price reduction multiplied by the number of units already being sold and the gain in revenue is the number of new units sold multiplied by the price at which they are sold o Net change in total revenue is the difference between these two amounts  The value of elasticity declines steadily as we move down the demand curve  Profit maximizing monopolist will always produce on the elastic portion of its demand curve (where MR is positive) Short Run Profit Maximization  Recall rules about profit maximization: Rule 1: The firm should not produce at all unless price (average revenue) exceeds average variable cost Rule 2: If the firm does produce, it should produce a level of output such that marginal revenue equals marginal cost  Profit maximizing output is at Q* where MC=MR which equal demand curve  MR=MC and p > AVC (AVC must be below ATC)  Profits = rectangle box of p*, intersection of Demand, ATC=Q*, and c  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  For profit maximizing monopolist, price is greater than marginal cost  No supply curve for a monopolist  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  Has a marginal cost curve  Firm and Industry o No need for industry since monopolist= industry o Short run profit maximizing position of firm = short run equilibrium of industry o Inefficient of Monopoly: Level of output in monopolized industry is less than the level of output that would be produced if the industry were perfectly competitive  Competition and Monopoly Compared  Monopolist restricts output below the competitive level and thus reduces the amount of economic surplus generated in the market, therefore creates an inefficient market outcome (marginal revenue to society of extra units reflected by the price exceed marginal cost of producing the extra units) Entry Barriers and Long Run Equilibrium  If monopoly profits are to persists in the long run, the entry of new firms into the industry must be prevented otherwise the firm will no longer be a monopoly and will have to share
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