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Chapter 5 & 6 .2.1 Main Monopoly

Chapter 5 & 6 .2.1 Main Monopoly. REVENUE. Revenue curves when price varies with output (downward-sloping demand curve). Revenues for a firm facing a downward sloping demand curve. REVENUE. Revenue curves when price varies with output (downward-sloping demand curve) average revenue (AR).

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Chapter 5 & 6 .2.1 Main Monopoly

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  1. Chapter 5 & 6 .2.1 Main Monopoly

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

  3. Revenues for a firm facing a downward sloping demand curve

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

  5. 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

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

  7. Why is the MR curve below the Demand Curve?

  8. Why is the MR curve below the Demand Curve? • MR = AR + something negative

  9. 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

  10. TR curve for a firm facing a downward-sloping D curve Now to sell more have to lower price So gain from additional sales has to be weighed against lower price on all goods. At some point Revenue will be maximized TR (£) TR Quantity

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

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

  13. TR curve for a firm facing a downward-sloping D curve For a maximum, derivative of TR function must be equal to Marginal costs

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

  15. MONOPOLY • Essential Characteristics of the monopolist's demand curve • downward sloping • MR below AR

  16. Profit maximising under monopoly £ AR MR O Q

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

  18. Profit maximising under monopoly £ MC MR=MC rule still applies Determines Qm MR Qm O Q

  19. Profit maximising under monopoly £ MC Given MR=MC, we then find Price at Qm a AR AR MR Qm O Q

  20. Profit maximising under monopoly £ MC ..and profits? AC a AR b AC AR MR Qm O Q

  21. MONOPOLY • Defining monopoly • Barriers to entry • Natural monopoly

  22. 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

  23. MONOPOLY • Disadvantages of monopoly • high prices / low output

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

  25. Equilibrium of industry under perfect competition and monopoly:with the same MC curve £ MC P1 P2 AR = D MR Q1 Q2 O Q

  26. Equilibrium of industry under perfect competition and monopoly:with the same MC curve £ MC ( = supply under perfect competition) P1 P2 AR = D MR Q1 Q2 O Q

  27. MONOPOLY • Disadvantages of monopoly • high prices / low output: short run and long run

  28. MONOPOLY Is monopoly ever an advantage? Yes, if economies of scale are significant. Also, monopoly profits may be necessary to “fuel” innovation (think of medical industry)

  29. Natural Monopoly £ LRAC MC O Q

  30. Industry Demand Curve D £ If two firms in the industry (A Duopoly) the demand curve for each is DD (half the market) DD D O Q

  31. Natural Monopoly £ Since LRAC is always above AR no production occurs (in the long run) NOTE: Decreasing LRAC, constant MC (big initial investment, but low “per unit” costs) LRAC DD MC MR O Q Q0

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

  33. Natural Monopoly £ With one firm, however, equilibrium occurs at Qm Dm Pm LRAC MC MR O Qm Q

  34. Natural Monopoly £ With one firm, however, equilibrium occurs at Qm Dm Pm LRAC MC MR O Qm Q

  35. Natural Monopoly • Here with just two firms, 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.

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