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Chapter 10

Chapter 10 Reading Notes.docx

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Michael H O

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Chapter 10 Reading Notes A single Price Monopoly • a monopolist is the sole producer of the product that it sells, the demand curve it faces is simply the market demand curve for that product. The market demand curve shows the quantity that the buyers want to purchase at each price, and also shows the quantity that the monopolist will be able to sell at each price. • unlike a perf competitive firm, monopolists face a negatively sloped demand Average Revenue • when the monopolist charges the same price for all units sold, it's TR is simplu equal to the single price times the quantity sold: TR = p x Q • since average revenue is total revenue divided by the quantity, it follows that average revenue is equal to the price: AR = TR/Q = (p x Q)/Q = p • and since the demand curve shows the price of the product, it follows that the demand curve is also the monopolist's average revenue curve Marginal Revenue • because the demand 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 the price received for the extra unit sold is not the firm's marginal revenue because by reducing the price on all previous units, the firm loses some revenue. • marginal revenue is therefore equal to the price minus this 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. • READ ON PAGE 227-228 AND LOOK AT FIGURE 10-1 Short Run Profit Maximization • recall two general rules about profit maximization o the firm shouldn't produce unless price (average revenue) exceeds average variable cost o if the firm does produce, it should produce a level of output such that marginal revenue equals marginal cost • price charged to consumers is determined by the demand curve. • READ ON PAGE 229 • There is no supply curve in a monopoly, this is 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. • a monopolist has a marginal cost curve. its profit maximizing level of output is determined where the MC=MR. where they intersect • monopolist is the only producer in the industry, therefore a monopoly is the industry • the equilb is when the price is greater than marginal cost. • The level of output in a monopoly is less than the level of output that would be produced if the industry were instead made up of many price-taking firms. So...the produce lower levels and charge higher than marginal cost • therefore, more economic surplus could be generated if the monopolist increases the level of output. The monopolist's profit maximizing decision to restrict output below the competitive level creates a loss of economic surplus for society - a dead weight loss. Entry Barriers and Long Run Equilb. not that important..but read on page 231-onwards • If monopoly profits are to persist in the long run, the entry of new firms into the industry must be prevented • entry barrier - what prevents new firms from coming in. • entry barriers can be natural or created • in competitive industries, profits attract entry, and entry erodes profits. In monopolized industries, positive profits can persist as long as there are effective entry barriers. Cartels as Monopolies • cartel is an organization of producers who agree to act as a single seller in order to maximize joint profits • when they want to form a cartel. they must recognize the effect their joint output has on price. THey need to recognize that an increase in the total volume of their sales requires a reduction in price. They can agree to restrict industry output to the level that maximizes their joint profits (where MC=MR). • the incentive to form cartel lies in the cartel's ability to restrict output, thereby raising price and increasing profits. • profit-maximizing cartelization of a competitive industry will reduce output and raise price from the perf comp levels. Problems that cartels face. READ ON PAGE 236-237 • first is ensuring that members follow the behaviour that wll maximize the cartel members' joint profits • second is preventing these profits from being eroded by the entry of new firms • managers of any cartel is made more difficult when individual firms either stay out of the cartel or join the cartel and then cheat by producing too much output. • If all the firms cheat, the price will be pushed back to the competitive level. • because of this cartels tend to be unstable because of the incentives for individual firms to violate output restrictions needed to sustain the joint-profit-maximizing (monopoly) price. Price Discrimination • the sale by one firm of different units of a commodity at two or more different prices for reasons not associated with difference in cost. • occurs when a producer charges di
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