Chapter 10

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Economics for Management Studies
Gordon Cleveland

Chapter 10: Monopoly, Cartels, and Price Discrimination A monopoly occurs when the output of an entire industry is produced and sold by a single firm, called a monopolist or a monopoly firm. 10.1 A SINGLE-PRICE MONOPOLIST Cost and Revenue in the Short Run Because 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. Unlike a perfectly competitive firm, a monopolistic faces a negatively sloped demand curve. For a monopolist, sales can be increased only if price is reduced, and price can be increased only if sales are reduced. Average Revenue TR = p X Q AP = p Marginal Revenue Marginal revenue is the revenue resulting from the sale of one more unit of the product. The monopolists marginal revenue is less than the price at which it sells its output. Thus the monopolists MR curve is below its demand curve. MR = change in TR change in Q The perfectly competitive firm is a price taker; it can sell all it wants at the given market price. In contrast, the monopolist faces a negatively sloped demand curve; it must reduce the market price to increase its sales. A profit-maximizing monopolist will always produce on the elastic portion of its demand curve (where MP is positive).
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