Chapter 5 & 6 .2.1 Main Monopoly

1. Chapter 5 & 6 .2.1 Main Monopoly

2. REVENUE • Revenue curves when price varies with output (downward-sloping demand curve) • average revenue (AR)

3. AR and MR curves for a firm facing a downward-sloping D curve Q (units) TR (£) MR (£) P =AR (£) 8 7 6 5 4 3 2 8 14 18 20 20 18 14 1 2 3 4 5 6 7 6 4 2 0 -2 -4 AR, MR (£) AR Quantity MR

4. TR at P=6, Q = 3 is 18 • TR at P=5, Q = 4 is 20 • So MR = 2 • Alternative Story: • Gain from selling one more unit = 5 • But now have reduced price from 6 to 5 on the first three units sold. • So losing 3*£1=£3 as a result • MR = price of extra unit (5) less price reduction on all units sold previously (3) = 5 – 3 = 2

5. Why is the MR curve below the Demand Curve To differentiate P.Q we use the product rule. Let u=P and v=Q

6. Why is the MR curve below the Demand Curve? • MR = price of extra unit (5) less price reduction on all units sold previously (3) • = 5 – 3 = 2

7. TR curve for a firm facing a downward-sloping D curve TR TR (£) MR Quantity

8. revenue curves and price elasticity of demand Consider once again the derivative of the Total Revenue Function

9. revenue curves and price elasticity of demand

10. revenue curves and price elasticity of demand For Perfect Competition the demand curve the firm faces is elastic so,

11. revenue curves and price elasticity of demand For a downward sloping demand function, when Total Revenue is a maximum

12. TR curve for a firm facing a downward-sloping D curve Elasticity = -1 Elastic Inelastic TR TR (£) Quantity

13. AR and MR curves for a firm facing a downward-sloping D curve Elastic Elasticity = -1 Inelastic AR, MR (£) AR Quantity MR

14. MONOPOLY • Essential Characteristics of the monopolist's demand curve • downward sloping • MR below AR • AND • the Monopolist will always be on the elastic portion of her demand curve • Why? Surely if Elastic that implies a rise in Q would result in a rise in Revenue? • Ans: What is happening to costs!!!!

15. Profit maximising under monopoly £ MC AC AR MR O Q

16. What is the supply curve for the monopolist? There isn’t any Why not? £ MC AC AR AR MR Qm O Q

17. What is the supply curve for the monopolist? The Supply Curve is a unique relationship between Price and Quantity £ a P0 Here we found that monopolist will supply the same amount at two different prices So no Supply Curve b P1 Qm O Q

18. MONOPOLY • Defining monopoly • Barriers to entry • economies of scale • product differentiation and brand loyalty • lower costs for an established firm • ownership or control over key factors • ownership or control over outlets • legal restrictions • mergers and takeovers • aggressive tactics • intimidation • Natural monopoly

19. Natural Monopoly £ Long –Run average cost curve is downward sloping When will this occur? If there are large Fixed Costs and small MC LRAC MC O Q

20. Equilibrium of industry under perfect competition and monopoly:with the same MC curve £ MC P1 AR = D MR Q1 O Q

21. MONOPOLY • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency • Advantages of monopoly • Yes, if economies of scale are significant • The case of a Natural Monopoly

22. Natural Monopoly £ LRAC MC O Q

23. Natural Monopoly £ With one firm, however, Dm DD LRAC MC O Qm Q

24. Natural Monopoly • Here with competition no production at all • But with monopoly production takes place that would not otherwise happen. • There may be supernormal profits, but scale of production allows lower cost and a (profitable) market price agents are willing to pay.

25. Economies of Scale An alternative version of the story is to examine an industry where the cost curve an individual firm faces falls as the scale of production rises. SO now we are going to examine the Equilibrium of industry under perfect competition and monopoly:with different MCcurves

26. Equilibrium of industry under perfect competition and monopoly:with different MC curves MC ( = supply)perfect competition £ MCmonopoly P2=MR. =MC AR = D MR Q2 O Q

27. Economies of Scale • Here with competition high priced production and low scale • Monopoly allows economies of scale to be exploited and hence a lower cost of production. • There may be supernormal profits, but consumers still better off than before: • Lower Price and Greater Quantity

28. Note Monopoly is better as long as the new MC curve lies below point x MC ( = supply)perfect competition £ MCmonopoly P2=MR. =MC P1 x AR = D MR Q2 O Q1 Q

29. Any suggestions as to Price regulator might choose? MC ( = supply)perfect competition £ MCmonopoly AC P2 P1 AR = D MR Q2 O Q1 Q

30. Any suggestions as to Price regulator might choose? MC ( = supply)perfect competition £ MCmonopoly AC P2 P1 AR = D MR Q2 O Q1 Q

31. MONOPOLY • Disadvantages of monopoly • high prices / low output: short run • high prices / low output: long run • lack of incentive to innovate • X-inefficiency • Advantages of monopoly • economies of scale • profits can be used for investment (dodgy!!) • promise of high profits encourages risk taking (Still a bit dodgy – what is appropriate risk taking?)

32. MONOPOLY • The monopolist's demand curve • downward sloping • MR below AR • Equilibrium price and output • Limit pricing

33. PROFIT MAXIMISATION • Some qualifications • long-run profit maximisation • the meaning of profit • What if a loss is made? • loss minimising: still produce where MR = MC • short-run shut-down point:P = AVC • long-run shut-down point:P = LRAC