1 / 16

Monopoly

Monopoly. Assumptions. One seller and many buyers No close substitutes High barriers to entry. Can a monopolist add to barriers to entry?. Patents Economies of scale Brand loyalty Access to raw materials High sunk costs Government regulations Threat of retaliation.

peri
Download Presentation

Monopoly

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Monopoly

  2. Assumptions • One seller and many buyers • No close substitutes • High barriers to entry

  3. Can a monopolist add to barriers to entry? • Patents • Economies of scale • Brand loyalty • Access to raw materials • High sunk costs • Government regulations • Threat of retaliation

  4. Firm’s demand curve: Perfect competition • A pc firm is too small to have any affect on the market price (Pm), and • apc firm can sell all it wants at Pm, and • if a pc firm raises its price by even 1¢ it will lose ALL of its customers, so • a pc firm’s demand curve is horizontal at the market price.

  5. Firm’s demand curve:Monopoly • The monopolist IS the market. • If the monopolist wants to sell more it must lower its price. • Of course, if it is willing to sell less, it can raise the price.

  6. Marginal revenue • Definition of MR = the change in total revenue (TR = P x Q) from selling one more unit. • For a pc firm, MR equals the market price. • For a monopolist, it is more complicated because the firm must lower its price to sell an extra unit.

  7. Monpolist’s MR • If the monopolist could continue charging the same price, its MR would equal P. • Because the firm must lower its price to sell the extra unit, it will add less revenue, so MR < P. • How much revenue does it lose by cutting its price? That depends on how many it would sell at the original price.

  8. Monopolist’s MR • If a firm is selling 10 units and it must lower price by $5 to sell one more (the 11th), it loses $50 of revenue. • If a firm is selling 100 units and lowers its price by $5, it loses $500 of revenue. • “The more a firm sells, the more it loses by reducing its price to sell one more.”

  9. PC firm’s MR

  10. Monopolist’s MR

  11. Monopolist’s D and MR

  12. Monopolist’s D & MR • The MR curve is below the D curve. Why? • The gap between MR and D increases as Q increases. Why? • The MR and D curves start at the same point. Why?

  13. Profit maximization

  14. Total profit at Q* • Add AVC and ATC curves to the previous graph. • Show the total profit at Q*. • Is this accounting or economic profit? Why?

  15. Q* and elasticity • Can profits possibly be maximized in the inelastic part of the demand curve? • If demand is inelastic, what can you do to increase total profits? When will you stop? • Can Q* be in the lower half of the demand curve on the next slide?

  16. Q* and elasticity

More Related