Beruflich Dokumente
Kultur Dokumente
By Gregory Mankiw
Lecture 10
1 Source: Copyright 2004: South Western 27-Oct-11
The markets in which the firm operate vary a great deal. Economists identify four market types on the basis of Control over Prices.
1. 2. 3. 4.
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Firm in Monopoly
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What is Monopoly
it is the sole seller of its product. its product does not have close substitutes. There are barriers to entry
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The government gives a single firm the exclusive right to produce some good.
Costs of production make a single producer more efficient than a large number of producers.
Its called natural monopoly and arises when there are economies of scale over the relevant range of output.
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Quantity of Output
Source: Copyright 2004: South Western 27-Oct-11
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Competitive Firm
Is one of many producers Faces a horizontal demand curve Is a price taker Sells as much or as little at same price Is the sole producer Faces a downward-sloping demand curve Is a price maker Reduces price to increase sales
Monopoly
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Demand
Demand
Quantity of Output
Quantity of Output
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A Monopolys Revenue
Total Revenue P Q = TR
Average Revenue
TR/Q = AR = P Marginal Revenue DTR/DQ = MR
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Marginal revenue 1 2 3 4 5 6 7 8
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A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. MR=MC It then uses the demand curve (which is also AR curve) to find the price that will induce consumers to buy that quantity.
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2. . . . and then the demand curve shows the price consistent with this quantity. B
Monopoly price
1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity . . .
Marginal cost
Demand
Marginal revenue
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QMAX
Quantity
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For a competitive firm, price equals marginal cost. P = MR = MC For a monopoly firm, price exceeds marginal cost. P > MR = MC
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Demand
Marginal revenue
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QMAX
Quantity
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Demand
Marginal revenue
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QMAX
Quantity
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A Monopolists Profit
The monopolist will receive economic profits as long as price is greater than average total cost.
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MONOPOLISTIC COMPRTITION
A type of Market
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One firm
Few firms
Differentiated products
Identical products
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Markets that have some features of competition and some features of monopoly.
Many sellers
There are many firms competing for the same group of customers. Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc. Each firm produces a product that is at least slightly different from those of other firms. Rather than being a price taker, each firm faces a downwardsloping demand curve.
Product differentiation
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ATC
Demand
MR
0
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Profitmaximizing quantity
Quantity
Losses
MR 0
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Demand
Quantity
Lossminimizing quantity
Firms will enter and exit until the firms are making exactly zero economic profits.
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P = ATC
Demand MR 0
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Copyright2003 Southwestern/Thomson Learning
Profit-maximizing quantity
Quantity
Long-Run Equilibrium
Two Characteristics
Profit maximization requires marginal revenue to equal marginal cost. The downward-sloping demand curve makes marginal revenue less than price.
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