Chapter 5.4 6 Monopoly Chapter 5.4 6 Monopoly. REVENUE Revenue curves when price varies with output...

Chapter 5.4 &6Monopoly

REVENUEREVENUE

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

Revenues for a firm facing a downward sloping Revenues for a firm facing a downward sloping demand curvedemand curve

REVENUEREVENUE

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

PQQP

QTRAR

.

REVENUEREVENUE


– marginal revenue (MR)

-4

-2

0

2

4

6

8

1 2 3 4 5 6 7

ARAR and and MRMR curves for a firm facing a downward-sloping curves for a firm facing a downward-sloping D D curvecurveQ

(units)1234567

P =AR(£)8765432

D= ARAR

, MR

(£)

Quantity

5

• TR at P=6, Q = 3 is 18TR at P=6, Q = 3 is 18• TR at P=5, Q = 4 is 20TR at P=5, Q = 4 is 20• So MR = 2So MR = 2

• Alternative Story:Alternative Story:• Gain from selling one more unit = 5Gain from selling one more unit = 5• But now have reduced price from 6 to 5 on the first But now have reduced price from 6 to 5 on the first

three units sold.three units sold.• So losing 3*£1=£3 as a resultSo losing 3*£1=£3 as a result• MR = price of extra unit (5) less price reduction on MR = price of extra unit (5) less price reduction on

all units sold previously (3) = 5 – 3 = 2all units sold previously (3) = 5 – 3 = 2

Revenues for a firm facing a downward sloping Revenues for a firm facing a downward sloping demand curvedemand curve

2

-4

-2

0

2

4

6

8

1 2 3 4 5 6 7

Q(units)

1234567

P =AR(£)8765432

TR(£)

8141820201814

MR(£)

6420

-2-4

AR

MR

AR

, MR

(£)

Quantity

ARAR and and MRMR curves for a firm facing a downward-sloping curves for a firm facing a downward-sloping D D curvecurve

Why is the MR curve below the Demand Why is the MR curve below the Demand CurveCurve

dQdTRMR QPTRbut .

dQQPdMR ].[

Do differentiate P.Q we use the product rule. Let u=P and

v=Q

dQduv

dQdvu

dQvud

].[

dQdPQ

dQdQP

dQQPd

].[

dQdPQP

dQQPd

].[

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

dQdTRMR

dQdPQP

dQQPd

].[

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

MR

•MR = price of extra unit (5) less price MR = price of extra unit (5) less price reduction on all units sold previously (3) reduction on all units sold previously (3)

•= 5 – 3 = 2= 5 – 3 = 2

dQdPQP

-4

-2

0

2

4

6

8

1 2 3 4 5 6 7

Q(units)

1234567

P =AR(£)8765432

TR(£)

8141820201814

MR(£)

6420

-2-4

AR

MR

AR

, MR

(£)

Quantity


REVENUEREVENUE



– total revenue (TR)

0

4

8

12

16

20

0 1 2 3 4 5 6 7

TRTR curve for a firm facing a downward-sloping curve for a firm facing a downward-sloping DD curve curve

Quantity

TR (£

)

Quantity(units)

1234567

P = AR(£)

8765432

TR(£)

8141820201814

0

4

8

12

16

20

0 1 2 3 4 5 6 7


TR

Quantity

TR (£

)

Quantity(units)

1234567

P = AR(£)

8765432

TR(£)

8141820201814

0

4

8

12

16

20

0 1 2 3 4 5 6 7


TR

Quantity

TR (£

)

MR

REVENUEREVENUE




– revenue curves and price elasticity of demand

-4

-2

0

2

4

6

8

1 2 3 4 5 6 7

AR

MR

Elasticity = -1Elastic

Inelastic

AR

, MR

(£)

Quantity


MONOPOLYMONOPOLY

• Essential Characteristics of the monopolist's demand curve– downward sloping– MR below AR

£

Q O

MR

AR

Profit maximising under monopolyProfit maximising under monopoly

MONOPOLYMONOPOLY

• The monopolist's demand curve– downward sloping– MR below AR

• Equilibrium price and output

£

Q O

AC

MC

MR

AR


Profit maximising under monopolyProfit maximising under monopoly£

Q O

MC

Qm

MR

MR=MC rule still applies

Determines Qm

£

Q O

MC

AR

Qm

MR

AR

a


Given MR=MC, we

then find Price at Qm

£

Q O

AC

MC

AR

AC

Qm

MR

AR

a

b


..and profits?

£

Q O

AC

MC

AR

Qm

MR

AR

What is the supply curve for the monopolist?What is the supply curve for the monopolist?There isn’t

any

Why not?

£

Q O Qm

What is the supply curve for the monopolist?What is the supply curve for the monopolist?The Supply Curve is a unique relationship between Price and

Quantity

£

Q O

AC

MC

P0

Qm

MR0

AR1

a

b

What is the supply curve for the monopolist?What is the supply curve for the monopolist?

But here not unique

P1

MR1

AR0

£

Q O

P0

Qm

a

b

What is the supply curve for the monopolist?What is the supply curve for the monopolist?

P1

The Supply Curve is a unique relationship between Price and

Quantity

Here we found that monopolist will

supply the same amount at two different prices

So no Supply Curve

£

Q O Qm

What is the supply curve for the monopolist?What is the supply curve for the monopolist?The Supply Curve is a unique relationship between Price and

Quantity

Here we found that monopolist will

supply the same amount at two different prices

MONOPOLYMONOPOLY

• Defining monopoly• Barriers to entry• Natural monopoly

MONOPOLYMONOPOLY

• 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

Natural MonopolyNatural Monopoly£

O Q

LRAC

Long –Run average cost curve is downward sloping

When will this occur?

If there are large Fixed Costs and small MC

MC

MONOPOLYMONOPOLY

• Disadvantages of monopoly– high prices / low output: short run

£

Q O

MC

Q1

MR

AR = D

P1

Equilibrium of industry under perfect competition and monopoly:Equilibrium of industry under perfect competition and monopoly: with the same with the same MCMC curve curve

£

Q O

MC

Q1

MR

P1

P2

Q2


AR = D

£

Q O

MC ( = supply under perfect competition)

Q1

MR

P1

P2

Q2


AR = D

MONOPOLYMONOPOLY

• Disadvantages of monopoly– high prices / low output: short run– high prices / low output: long run (Profits not

eliminated)

MONOPOLYMONOPOLY

• Disadvantages of monopoly– high prices / low output: short run– high prices / low output: long run– lack of incentive to innovate

MONOPOLYMONOPOLY

• Disadvantages of monopoly– high prices / low output: short run– high prices / low output: long run– lack of incentive to innovate– X-inefficiency

MONOPOLYMONOPOLY


• Advantages of monopoly

MONOPOLYMONOPOLY


• Advantages of monopoly– economies of scale


O Q

LRAC

MC

Industry Demand CurveIndustry Demand Curve£

O Q

D

If two firms in the industry (A Duopoly) the demand curve for

each is D1

Pmax

At prices above Pmax competitor gets all the

businessDD


O Q

LRAC

MC

This industry is uncompetitive with two

firms

And no production occurs

DD


O Q

LRAC

MC

With one firm, however, equilibrium occurs at Qm

MR

Qm

Pm

DD

Dm

An alternative version of the story is to examine an An alternative version of the story is to examine an industry where the cost curve an individual firm industry where the cost curve an individual firm

faces falls as the scale of production rises.faces falls as the scale of production rises.

SO now we are going to examine the Equilibrium of SO now we are going to examine the Equilibrium of industry under perfect competition and monopoly:industry under perfect competition and monopoly:

with with different different MCMC curvescurves

£

Q O

MC ( = supply)perfect competition

MR

P2=MR. =MC

Q2

AR = D

Equilibrium of industry under perfect competition and monopoly:Equilibrium of industry under perfect competition and monopoly:with different with different MCMC curves curves

£

Q O


MRQ2

MCmonopoly

AR = D


P2=MR. =MC

£

Q O


Q1

MR

P1

Q2

MCmonopoly

AR = D


P2=MR. =MC

£

Q O


Q1

MR

P1

Q2

MCmonopoly

AR = D


P2=MR. =MC

AC

£

Q O


Q1

MR

P1

Q2

MCmonopoly

x

AR = D

Note Monopoly is better as long as the new MC curve lies below Note Monopoly is better as long as the new MC curve lies below point xpoint x

P2=MR. =MC

£

Q O


Q1

MR

P1

P2

Q2

MCmonopoly

P3

AR = D

Suppose a regulator set the price at PSuppose a regulator set the price at P3 3 (Average Cost Pricing). How (Average Cost Pricing). How would this effect the behaviour of the monopolists?would this effect the behaviour of the monopolists?

AC

£

Q O


Q1

MR

P1

P2

Q2

MCmonopoly

Q3

P3

AR = D

Suppose a regulator set the price at PSuppose a regulator set the price at P3 3 (Average Cost Pricing). How (Average Cost Pricing). How would this effect the behaviour of the monopolists?would this effect the behaviour of the monopolists?

MONOPOLYMONOPOLY


• Advantages of monopoly– economies of scale– profits can be used for investment (Dodgy)

MONOPOLYMONOPOLY


• 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?)

MONOPOLYMONOPOLY

• The monopolist's demand curve– downward sloping– MR below AR

• Equilibrium price and output• Limit pricing

Limit pricingLimit pricing

AC monopolist

£

O Q


AC new entrant

AC monopolist

£

O Q


AC new entrant

AC monopolist

£

O Q

PL


0

4

8

12

16

20

0 1 2 3 4 5 6 7

TR

Elasticity = -1

Elastic

Inelastic

Quantity

TR (£

)

REVENUEREVENUE




– revenue curves and price elasticity of demand

• Shifts in revenue curves

PROFIT MAXIMISATIONPROFIT MAXIMISATION

• Using total curves– maximising the difference between TR and TC

Finding maximum profit using total curvesFinding maximum profit using total curvesTR

, TC

, T

(£)

TR

TC

Quantity

-8

-4

0

4

8

12

16

20

24

1 2 3 4 5 6 7


• Using total curves– maximising the difference between TR and TC– the total profit curve

-8

-4

0

4

8

12

16

20

24

1 2 3 4 5 6 7

TR, T

C, T

(£

)

T

TR

TC

Quantity

Finding maximum profit using total curvesFinding maximum profit using total curves

-8

-4

0

4

8

12

16

20

24

1 2 3 4 5 6 7

TR, T

C, T

(£

)

T

TR

TC

a

b

c d

Quantity


-8-6-4-202468

1012141618202224

1 2 3 4 5 6 7

TR, T

C, T

(£

)

T

TR

TC

d

e

f

Quantity




• Using marginal and average curves



• Using marginal and average curves– stage 1:

profit maximised where MR = MC

-4

0

4

8

12

16

20

1 2 3 4 5 6 7

MC

MR

Quantity

Cos

ts a

nd re

venu

e (£

)Finding the profit-maximising output using marginal curvesFinding the profit-maximising output using marginal curves

-4

0

4

8

12

16

20

1 2 3 4 5 6 7

Finding the profit-maximising output using marginal curvesFinding the profit-maximising output using marginal curvesMC

MR

Quantity

Cos

ts a

nd re

venu

e (£

)

Profit-maximising outpute



• Using marginal and average curves– stage 1:

profit maximised where MR = MC– stage 2:

using AR and AC curves to measure maximum profit

-4

0

4

8

12

16

1 2 3 4 5 6 7

MR

Quantity

Cos

ts a

nd re

venu

e (£

)

Profit-maximising outpute

MCFinding the profit-maximising output using marginal curvesFinding the profit-maximising output using marginal curves

-4

0

4

8

12

16

1 2 3 4 5 6 7

Measuring the maximum profit using average curvesMeasuring the maximum profit using average curves

MR

Quantity

Cos

ts a

nd re

venu

e (£

)

MC

AC

AR

-4

0

4

8

12

16

1 2 3 4 5 6 7

MR

Quantity

Cos

ts a

nd re

venu

e (£

)

MC

AC

AR

6.004.50

a

b


-4

0

4

8

12

16

1 2 3 4 5 6 7

MR

Quantity

Cos

ts a

nd re

venu

e (£

)

MC

AC

AR

6.004.50 TOTAL PROFITTOTAL PROFIT



• Some qualifications– long-run profit maximisation– the meaning of profit

• What if a loss is made?– loss minimising:

still produce where MR = MC

Loss-minimising outputLoss-minimising output

O

Cos

ts a

nd re

venu

e (£

)

Quantity

MC

AC

AR

MC

O

Cos

ts a

nd re

venu

e (£

)

Quantity

MC

AC

AR

MC

Q


O

Cos

ts a

nd re

venu

e (£

)

Quantity

MC

AC

AR

MC

Q

AC

AR


O

Cos

ts a

nd re

venu

e (£

)

Quantity

MC

AC

AR

MC

Q

LOSSLOSS

AC

AR





still produce where MR = MC– short-run shut-down point:

P = AVC

The short-run shut-down pointThe short-run shut-down point

O

Quantity

AVCAC

Cos

ts a

nd re

venu

e (£

)

O

Quantity

AVCAC

AR

Cos

ts a

nd re

venu

e (£

)The short-run shut-down pointThe short-run shut-down point

O

Cos

ts a

nd re

venu

e (£

)

Quantity

AR

AVCACP =

AVC

Q

The short-run shut-down pointThe short-run shut-down point




still produce where MR = MC– short-run shut-down point:

P = AVC– long-run shut-down point:

P = LRAC

Date post:	18-Jan-2018
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Chapter 5.4 6 Monopoly Chapter 5.4 6 Monopoly. REVENUE Revenue curves when price varies with output...

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