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Monopoly

Learn about the conditions and strategies for maximizing profit in a monopolistic market, including equilibrium, cost changes, and price regulation.

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Monopoly

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  1. Monopoly

  2. Maximize Profit Condition A Monopolistic maximizes profit by producing quantity Q* where marginal revenue equals marginal cost MR ( Q* ) = MC ( Q* )

  3. P P D P1 D Q1 Q1+1 Q Q1 Q1+1 Q Marginal Revenue 2 1

  4. Marginal Revenue

  5. Average Revenue

  6. AR, P D = AR = P MR Q MR < P , when output is positive

  7. Exercise Suppose that the equation of the market demand curve is P = a – bP What are the expressions for the average and marginal revenues

  8. Profit Maximization Profit Maximization Condition

  9. TR TR,TC TC Profit 0 Q MC MR = P 0 Q MC > MR MC < MR MC = MR MC > MR Competitive Market

  10. TR,TC TC TR 0 Q Profit MC D MR 0 Q MC < MR MC = MR MC > MR Monopoly

  11. AR, AC, P MC AC M P1 F C1 D = AR MR Q Q*

  12. AR, AC, P MC AC M P1 D = AR MR Q Cost Changes Q*

  13. AR, AC, P MC AC M P1 D = AR MR Q Q*

  14. Equilibrium in Long Run Less than optimal Scale of Plant Optimal Scale of Plant Greater than optimal Scale of Plant

  15. Exercise The equation of monopolist’s demand curve is P = 12 – Q While the equation of marginal cost is MC = Q Where Q is expressed in millions of ounces What is the profit maximizing quantity and price for the monopolist ?

  16. Exercise The equation of monopolist’s short run cost curve is C(Q) = 12 + Q2 While the equation of marginal revenue is MR = 24 - 2Q Where Q is expressed in millions of ounces What is the profit maximizing quantity and price for the monopolist ?

  17. AR, AC, P MC P1 M AC P* F D = AR MR Q Q* Firm Produce at MC < MR

  18. AR, AC, P Firm Produce at MC > MR MC M AC P* P1 F D = AR MR Q Q*

  19. AR, P MC D1 MR1 MR2 D2 Q Q1 Monopolist & Supply Curve

  20. AR, P AR, P P2 P1 MC MC D1 D1 MR1 Q Q Q1 Q2 Q1 Elasticity and Profit Maximized

  21. Marginal Revenue and Elasticity

  22. AR, AC, P Unitary elastic Elastic MR = 0 MR > 0 Inelastic MR < 0 D Q MR

  23. Rule of thumb for Pricing

  24. Exercise Market demand curve given by Q = 100P-2 While the equation of marginal cost is MC = 50 A ) What is the Monopolist’s optimal price? B ) Suppose that the market demand curve is given by the equation Q = 100P- 5 What is the monopolist’s optimal price?

  25. Exercise Market demand curve given by Q = 200 - P While the equation of marginal cost is Mc = 50 A ) Find the profit maximizing price and quantity for the monopolist using the Inverse Elasticity Price Rule ( IEPR ) B ) Find the profit maximizing price and quantity for the monopolist by equating MC = MR

  26. AR, AC, P Produce on Elastic Region B 1 A 2 D Q MR

  27. AR, AC, P MC P2 P1 D2 MR1 D1 Q Q1 Q2 MR2 Shift in Market Demand

  28. AR, AC, P P1 P2 MC D2 MR1 D1 Q Q1 Q2 Shift in Market Demand MR2

  29. Shift in MC AR, AC, P MC2 MC1 P2 P1 D Q Q2 Q1 MR Increase in MC must decrease TR

  30. Regulated Monopoly Price Regulation Average Cost Pricing Marginal Cost Pricing Tax Regulation Specific Tax Lump Sum Tax

  31. AR, AC, P AR = AC MC AC M P1 F PF MR D = AR QF QM Average Cost Pricing Q

  32. AR, AC, P Marginal Cost Pricing AR = MC MC AC M P1 I PI MR D = AR Q QI QM

  33. AR, AC, P Specific Tax MCt MR = MC + t MC AC + t Pt AC P1 I MR D = AR Q Qt Q1

  34. AR, AC, P Lump Sum Tax MR = MC MC AC + t P1 AC I Ct C1 MR D = AR Q Q1

  35. AR, AC, P Multiplant Monopoly MC1 MC2 MCT M PT D = AR MR Q1 Q2 QT

  36. Exercise Market demand curve for monopolist given by P = 120 – 3Q The monopolist has 2 plants, the first plant has a marginal cost function given by MC1 = 10 + 20Q1 The second plant’s marginal cost curve is given by MC2 = 60 + 5Q2 Find the monopolist’s optimal total quantity and price. Also find the optimal division of the monopolist’s quantity between its two plants

  37. AR, P AR, P Market Demand MC P D1 Q Q Q1 Qf Monopoly Power

  38. Measuring Monopoly Power

  39. AR, P AR, P MC P P-MC P-MC AR MR D1 Q Q Q1 Q1

  40. Source of Monopoly Power The Elasticity of Market Demand The Number of Firm The Interaction among the Firm

  41. AR, AC, P MC1 M PM C D = AR MR O QM The Welfare Economics of Monopoly

  42. AR, AC, P MC1 A M PM B D C E C D = AR MR O QM Monopoly Deadweight Loss

  43. Natural Monopoly P, AC, MC PM PR AC PC MC AR MR Q 0 QM QR QC

  44. Monopsony Monopsony is a market consisting of single buyer that can purchase from many sellers. Some buyers may have monopsony power : a buyer’s ability to affect the price of a good. Monopsony power enables the buyer to purchase the good for less than the price that would prevail in the competitive market

  45. AR, P AR, P MC ME = AE AR = MR P* D = MV Q Q Q* Q* Competitive Buyer & Competitive Seller

  46. AR, AC, P Monopsonist Buyer ME S = AE PC PM MV QM QC

  47. AR, AC, P AR, AC, P ME MC S = AE PM PC PC PM AR MV MR QM QC QM QC Monopoly and Monopsony

  48. AR, AC, P ME ME S = AE S = AE MV – P* P* MV – P* P* MV MV Q* Q* AR, AC, P

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