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Perfect
Competition =
Many firms
Oligopoly = A
few firms
Four Basic Models
Monopoly = One
firm
Monopolistic
Competition =
Some firms
Profit-Maximizing Monopolist Suppose only one seller in the market. For now, assume it sells all its output at
the same price (no price discrimination). Choose Q to maximize:
profits = TR - TFC - TVC. TFC do not depend on output, so
maximize TR - TVC.
Marginal Revenue Recall: for the price-taking firm, MR
= P. But: the monopolist faces the
market demand curve. As he sells more, he moves down the D curve and price falls.
Graph of Marginal Revenue
Q
P
D
3 4
10
9
ABLost 3
Gai
ned
9What is the MR of the 4th unit?
How does that compare to price?
Will it ever be possible to gain the price as MR?
Monopolist’s Marginal Revenue
P
DMR
Q
The monopolist’s marginal revenue (MR) curve lies everywhere below the demand curve.
MR < P.
Special Case: Straight-Line Demand
P
DMR
Q
The MR curve for a straight-line D curve lies 1/2-way between the D curve and the vertical axis.
105
Special Case: Straight-Line Demand
P
DMR
Q
Recall: Price elasticity falls as we move down the straight-line D curve.
Total revenue rises then falls as we move down the straight-line the D curve.
When = 1, revenue is at its maximum. That’s when MR = 0.
105
= 1
Choosing Quantity Maximize TR - TVC
TR is area under the MR curve. TVC is area under the MC curve. Therefore maximize the difference.
Monopolist’s Profit-Maximizing Rule
P
DMR
Q
Choose Q where MR = MC, charge the highest price possible.
Check:
In SR, is P AVC?
In LR, is P ATC?
Q*
MC
p*
Monopolist’s Profit-Maximizing Rule
P
DMR
Q
Will this monopolist produce in the LR?
In the SR?
Can you identify profits or losses?
Q*
MC
p*ATC
The Monopolist & A Supply Curve A monopolist does not have a supply
curve! He chooses his best price & quantity
combination on the market demand curve.
He is not a price taker, so the concept of a supply curve doesn’t make sense.
He is a price maker.
The Monopolist and Efficiency Productive efficiency: Some have
argued that a monopolist may get “lazy” and not keep costs at a minimum.
Others argue that if it’s goal is to maximize profits, that will be incentive enough to minimize costs.
This issue remains unsettled.
The Monopolist and Efficiency Allocative efficiency: Look at the
sum of producers’ and consumers’ surpluses.
Sum of Producers’ and Consumers’ Surplus
P
DMR
Q
Does the monopolist produce the quantity that is allocatively efficient?
Q*
MC
p*
The Allocatively Efficient Quantity
More PS & CS could be gained by producing QE.
The marginal benefits of the add’l units are more than their marginal costs.
P
D
QQM
MC
PM
QE
Efficiency of Monopolist If the monopolist were to produce &
sell the efficient quantity, he would have to set a lower price.
We say the monopolist reduces output and raises price compared to the efficient solution.
This causes a deadweight loss of producer’s & consumers’ surplus.
Deadweight Loss of CS & PS
Represents the cost to society of not producing the efficient quantity of this good.
P
D
QQM
MC
PM
QE
Effects of Monopolies Produce less than the efficient
quantity. Charge higher prices as a result. Consumers are hurt on both counts.
Group Work Try to complete the exercise without
looking back at your notes. Identify on the graph for a Monopolist
the profit-maximizing level of output. the price that the monopolist will charge
(assuming he charges a single price for all units).
the total profits or losses of the monopolist
More things to identify consumer’s surplus producer’s surplus the allocatively efficient quantity the deadweight loss associated with
having a monopoly in this market the supply curve