Chapter to: Market t P, lot Monopoly -Monopolist is tne mane ~ caynct charge any pree't wants ~ objective Is 10 maainse profit - = must Know costs & characteristicsof demand 10 max profit | Average Revenue & Marginal Revenue v beg onangein revenu € 1 receives per results Grom A unt 4 unit aold change in output (demand cure) See tableto-1_ © 31!) Deimeind curve fe downward Hoping, IARI Qvearer | AR ©) shan MR beat units | me are soll dt the same price Tre Moniopolists output decision To maximise preht MR musr = MC Profit fs the Fil edifference between revenue and cost io depend on Q.: =a T@)=Rad~cc@)Profit maximnising @ \e.such that the incremental profit __ feswiting froma small incredse IN @ is Just2ero _ (every iC mare Is produ ad proAt want bema t Se Its ali ecdy been MOK UICeG " stat AT . AR -~AG 29 os AQ A@ AG - v AR =AC 7 ¥ ; inal mavginal AG . “ieee ys Z MR = mc. ait J) See figure 10.1 and 10.2 Gra Ge) An example of profit maximization A rule of Thums for, Pricing — See Micw2 notes _ |Fdemand is ex tremely elastiged _ Pos Mc 's alarge neqquvenurrboer Ut C/ed) |pvce voll Bevery closete the Shel Ie ge Lenotginal cost» (little loenett int : Raomopetet) A monopolist Chavges a pace That excess — menepelict: —eoaginal eet ) bur by an amount that depends -—1Nrexsely orm the elasticity of demand. _Shifts in Demand Compatitife industry — Cetvalin price for Certain, or Monopoly ~ supple seve! Afferent quanti ee ar the same price or the same quantity at different prices, See Figures 10.49 6 IO-kb The effect of a tax Figure 10.8 price macases. by, mere than tne tax. This Would be inypossible jin. cornpetitve nm arcer ini tl i tts Monopolist can pull it off because the relations between price & Mc depends on the Ed. The monopolist’s prefit Nonetheless f\\¢ with the! Tor | The Multiplant Fim Step | Foreg. iF MC ® plant \shigher than © Pla! The fiom could preduce the Same output ata \od total cost by Producing jess @ Plant 1 and mot Step 2 Eg- Mc Sarne @ both plants, M R>MC ae more dt both Plants bc therevenué, ained fom theadditional units wouldexcectXhe cost Be me must bethe same at each piant ,and be MR must = Mc ,pmhr ig maked wnen MR=MC@ 2dch plant. Figure 10. Finding the prot - maximizing erp i levels Qt > Qs ,and Qr First Find the intetsection oF MCr with MR thar point determines tote outputto tne Yerrical axis Draw a horizontal line from Hnat point on the MR Curve 4o the yertical axis IntersecHoms of MR with MO 4 Mca gives the Outpurs Q1_and Gz for the 2 plants. 10.2 Monopoly Power, Power See notes to Figuies \O7 A A16-1 B hus, Firm A's demand cure depends on cotn how | Peace irs product aiffers From ts Competitols product S and on ow the Four Firms Compete wih one antherAbiny to Ser pices above MG 10-3. Sources of Monopoly Powe , Po Mc (depends inversely on the elasticity of demand facing the Fien | The elasticicy of market demand ese tooth bruch example The number of Firms Eg. ny only 2 large Fimns account for 40% of Sdles In. motel, with another 20 firms AccOUntINg for te femaining 10 ‘le, the 2 Jar firms nave Considerable mone poly power. | liad ocascealasetcaiaialaselitd The interaction armong Finns Ahigner amount of Compehhons din ve. pric down to Neany Competitive levels feroil For &g- the market demand cuwe might be Very Inelactic in the shor mun but more elasric in the long, tun. atid alice vanto-s. The Sacial Custs of Monopoly Power Wn A competitive cnaket P= MC Meno poly P>Mc Does MOM Poly Power Make consumes AM Prducels berser or worse off 7 Ans. compare consumer g producer surplus SEE FIGURE 10.10 Examine few ewrpius changes Eom corpatrire ae Pe & Qc’ to the manopely{under monopoly price is higher & cons pay les @Pm we Concumere buy the good & loase the sy Lvecrargle A Z ia} Consumers who pay Pe \ose Surplys Ling {rove \ces = ATB Tne preducer gains rectangle A butlose triangle C v 2? Ye additional profit they would Nave eat by Selling Qe- Qm @ price Pe - producey Net loss ot’s ulus A- Cc Joss-ot i Subarracsnayconeumers UrPUS From the gai 9 producer sur Plus , We see oy surplus Bre. “ erjocs of ‘9 This is the deadweight \ocs ean 1 Monopoly power L Soca\ Cost inefcle} wenRerr Seeing i Social cosris Neely to exceed Geddweignt loss in As ® &C because Gms Pray enapge in fent Seexing Price regulation Can eliminate the deadweight \esethat resuns ron Monopoly, paver. We must derermine now its overage e marginal | venue cures ove affected by theveguiation. Firm can cnarge no more than Px up to Qi MS New ayerage revenue Curve is. anorizontal \Wne at Py Gurput levels greater than Gi_the new AR cune 1s identical treold AR Curve ; C_ Fiem will charge less toan Py for thes QS ard are us unaffected by pricereguiation) For output levels up te Gi MR = AR See pA) For the Complere Mécuwe To maximise prohtt the Firm should produce Q where MR imersectS MC aansN akuval Monopdly Price requiarion is used fornatural monopolies, such loca) utility companies. & + Average cost ie dectining everywhere, MC is Always below AC + * the firm Neve unvebulared ib Would Produce Qm & se\ © price Po a The requiatowy agency, Would like +o push the Firms pncedown to bp he comperitne level Pc . i * BU that leye} AC and tne PNCe would not cover From would 9° ous of busin’10.5 Moneopseny. Market with a cingle buyer + Marginal means additional Marginal prnciple studies the effect of changes due t© one additional unit: Addinonal penefit should JUST. be offser by a Additional cost. oc Marginal value chedule (s your demand cure _ = For the cuwe,. 1 ? Figure lo. (1Wonopsorvist: buyer) M enopéony and Monopoly commpared- A : monopolist can charge a price Alecove. MGE incre because Ir faces a downward sioping demand [ or AR curve jSO MR< AR eee The nsep monopsonist can purchase ageed ata sty prcebelow MY because it faces an upward slophg suppy joc AE tuve Thus for A Meonopsonist IME je greafer stan Ab asjoe Monoriany fares IF supply 1S very este tsie\ Wille ermal) and the-buyer iv yower- supply ts Yery \orge and the bu menopsony POwer See Fgwes 10 Ib a &b Tre social custs of monopsony power 4 with monopsony. the price is lower and less is sold (preeuars) % Because of the lowerpnce, sellers lose q amt of surplus (rectangle A) k Sellers jose surplus given by tangle C | becquse of the reduced sales jorge 2) the Man i\\ have Wttle mer inelastic ythe MmarkcdonO willy yer nll have corsiderdble —4 # The tral joes of Preducer (Seller ) eurel 6 therefae ATC, | J * Buying at a lower pace jpuyer Qains Suq Yectangle A * The buyer Sy oiangie eB. buys lees so loses Supls gig* Total gain in surplus is therefore ATR + Net loss of Surplus te the buyer js therefore AnB *® There is anet loss of Surpus givenby B tC This is deadweight loss From monopseny power