5 monopoly
DESCRIPTION
PCP SESSION 3 - 13 NOV 2011. PREPARED BY NISHANT GARGTRANSCRIPT
Monopoly
Monopoly versus Competition
Monopoly Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales
Quantity of Output
Demand
(a) A Competitive Firm’s Demand Curve
(b) A Monopolist’s Demand Curve
0
Price
0 Quantity of Output
Price
Demand
Demand Curves for Competitive and Monopoly Firms...
A Monopoly’s Revenue
Total Revenue
P x Q = TR Average Revenue
TR/Q = AR = P Marginal Revenue
TR/Q = MR
A Monopoly’s Total, Average, and Marginal Revenue
Quantity(Q)
Price(P)
Total Revenue(TR=PxQ)
Average Revenue
(AR=TR/Q)Marginal Revenue(MR= )
0 $11.00 $0.001 $10.00 $10.00 $10.00 $10.002 $9.00 $18.00 $9.00 $8.003 $8.00 $24.00 $8.00 $6.004 $7.00 $28.00 $7.00 $4.005 $6.00 $30.00 $6.00 $2.006 $5.00 $30.00 $5.00 $0.007 $4.00 $28.00 $4.00 -$2.008 $3.00 $24.00 $3.00 -$4.00
QTR /
A Monopoly’s Marginal Revenue
A monopolist’s marginal revenue is always less than the price of its good.
The demand curve is downward sloping. When a monopoly drops the price to sell one
more unit, the revenue received from previously sold units also decreases.
Demand and Marginal Revenue Curves for a Monopoly...
Quantity of Water
Price
$11109876543210
-1-2-3-4
1 2 3 4 5 6 7 8
Marginalrevenue
Demand(average revenue)
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Profit Maximization of a Monopoly
A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
It then uses the demand curve to find the price that will induce consumers to buy that quantity.
Profit-Maximization for a Monopoly...
Monopolyprice
QuantityQMAX0
Costs andRevenue
Demand
Average total cost
Marginal revenue
Marginalcost
A
1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity...
B
2. ...and then the demand curve shows the price consistent with this quantity.
Comparing Monopoly and Competition
For a competitive firm, price equals marginal cost.
P = MR = MC For a monopoly firm, price exceeds
marginal cost.
P > MR = MC
Monopol
yprofit
The Monopolist’s Profit...
Quantity0
Costs andRevenue
Demand
Marginal cost
Marginal revenue
QMAX
BMonopolyprice
E
Averagetotal cost D
Average total cost
C
Long Run
Price Discrimination
Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
Examples of Price Discrimination
Movie tickets Airline prices Discount coupons Financial aid Quantity discounts
Case I
A monopolist firm sells a single product in two different markets either with different elasticities of demand
Case II
Dumping - when the firm is a monopolistic in the domestic market but faces perfect competition in the world market