Homework – November 6th Review pages 438 – 444. 1. Explain what it means to say that the monopolist is a “price maker.” 2. Explain the relationship between output and price for the monopolist. 3. Explain why the monopolist has no supply curve. 4. Draw a graph of a monopoly like the one on page 445. Include all the curves shown on figure 24.4. Use your graph to answer the following questions: a. Identify the monopolist’s profit- maximizing price and level of output on your graph. b. Shade in and label the area of economic profit (or loss) on your graph. c. If the monopolist’s marginal cost
Transcript
Homework – November 6th
Review pages 438 – 444.1. Explain what it means to say that the monopolist is a
“price maker.”2. Explain the relationship between output and price
for the monopolist.3. Explain why the monopolist has no supply curve.4. Draw a graph of a monopoly like the one on page
445. Include all the curves shown on figure 24.4. Use your graph to answer the following questions:
a. Identify the monopolist’s profit-maximizing price and level of output on your graph.
b. Shade in and label the area of economic profit (or loss) on your graph.
c. If the monopolist’s marginal cost decreases, how will price and quantity be affected? Show this on your graph.
Chapter 24 – Pure Monopoly
• What are the characteristics of Pure Monopoly? • Single seller• No close substitutes• Blocked entry
Chapter 24 – Pure Monopoly
• What are the market conditions that create a Pure Monopoly? • Barriers to Entry:
Economies of ScalePatents and licensesOthers
Pric
e
Quantity0
A monopoly is a price maker.
D
What does this mean?Because the firm is the entire industry, it decides output levels for the entire market.It then sets price based on market demand for the product at that level of output.
The demand curve, for the monopoly is downward sloping.
Q2
P2
Q1
P1
Marginal Revenue and Price
• In monopoly, price and marginal revenue are not the same.
• This is because of the monopoly’s downward-sloping demand curve.
• To increase output, the monopolist must lower price, not just for the next unit, but for all units.
• Example: if the monopolist could sell 10 units at $100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit?
Marginal Revenue and Price
• Example: if the monopolist could sell 10 units at $100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit?
10 x 100 = $100011 x 99 = $1089
• Total revenue goes up by $89, so marginal revenue is $89, not the $99 price.
Pric
e
Quantity0
For a monopoly, marginal revenue is always less than price.
DemandMarginal Revenue
Pric
e
Quantity0
How does a monopolist maximize profit?Set output where MR = MC.
D
MRQM
MC
Pric
e
Quantity0
What price does the monopolist charge?Follow the quantity where MR = MC up to the
demand curve.
D
MRQM
MC
PM
Pric
e
Quantity0
Notice the inefficiency in a monopoly:1. Output is less than where MC = Demand (MB to consumers) 2. Price is greater than marginal cost.
D
MRQM
MC
PM
Pric
e
Quantity0
What is the area of profit or loss for the monopolist?
D
MRQM
MC
PM
ATC
Profit
Pric
e
Quantity0
Does the monopolist always make a profit?
DMRQM
MC
PM
ATC
Loss
Pric
e
Quantity0
And finally, what happens to output when a monopoly’s costs change?
D
MRQM
MC
PM
ATC
P2
Q2
For the profit-maximizing monopolist, identify:a. Outputb. Price c. Total Profitd. Socially optimal (efficient) outpute. Socially optimal (efficient) price
End Part 1
Pric
e($)
QUANTITYQM
PM
MC
Demand
ATC
Marginal Revenue0
Consumer Surplus
Price Discrimination
Producer Surplus
Deadweight Loss
Price DiscriminationI. Conditions:
A. Monopoly power.B. Market segregation: separate your customers into
groups based on how much they’re willing to pay.C. No resale (customers cannot re-sell their purchase
to someone else at the lower price).II. Results:
A. Firm can charge each customer as much as they are willing to pay.
B. Increases profit and output.C. Decreases consumer surplus (perfect price
