Chapter 5 & 6.2.1 Main Monopoly Chapter 5 & 6.2.1 Main Monopoly.
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Chapter 5 & 6 .2.1Main Monopoly
Chapter 5 & 6 .2.1Main Monopoly
REVENUEREVENUE
• Revenue curves when price varies with output (downward-sloping demand curve)
• 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)
• Revenue curves when price varies with output (downward-sloping demand curve)
– average revenue (AR)
PQ
QP
Q
TRAR
.
-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
dQ
dTRMR QPTRbut .
dQ
QPdMR
].[ To differentiate P.Q we use the
product rule. Let u=P and v=Q
dQ
duv
dQ
dvu
dQ
vud
].[
dQ
dPQ
dQ
dQP
dQ
QPd
].[
dQ
dPQP
dQ
QPd
].[
Why is the MR curve below the Demand Why is the MR curve below the Demand Curve?Curve?
dQ
dTRMR
dQ
dPQP
dQ
QPd
].[
Why is the MR curve below the Demand Why is the MR curve below the Demand Curve?Curve?
MR
•MR = AR + something negativeMR = AR + something negative
dQ
dPQP
-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
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
(£
)
Now to sell more have to lower price
So gain from additional sales has to be weighed against lower price on
all goods.
At some point Revenue will be maximizedTR
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
TRTR curve for a firm facing a downward-sloping curve for a firm facing a downward-sloping DD curve curve
TR
Quantity
TR
(£
)
Quantity(units)
1234567
P = AR(£)
8765432
TR(£)
8141820201814
TRTR curve for a firm facing a downward-sloping curve for a firm facing a downward-sloping DD curve curve
For a maximum, derivative of TR function must be equal to Marginal costs
MCMR
MRdQ
dTRBut
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
TR
Quantity
TR
(£
)
MR
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
£
Q O
AC
MC
MR
AR
Profit maximising under monopolyProfit maximising under monopoly
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
Profit maximising under monopolyProfit maximising under monopoly
Given MR=MC, we
then find Price at Qm
£
Q O
AC
MC
AR
AC
Qm
MR
AR
a
b
Profit maximising under monopolyProfit maximising under monopoly
..and profits?
MONOPOLYMONOPOLY
• Defining monopoly• Barriers to entry• Natural monopoly
• 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
• 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
MONOPOLYMONOPOLY
• Disadvantages of monopoly– high prices / low output
• Disadvantages of monopoly– high prices / low output
£
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
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
AR = D
£
Q O
MC ( = supply under perfect competition)
Q1
MR
P1
P2
Q2
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
AR = D
MONOPOLYMONOPOLY
• Disadvantages of monopoly– high prices / low output: short run and long run
• Disadvantages of monopoly– high prices / low output: short run and long run
MONOPOLYMONOPOLY
Is monopoly ever an advantage?
Yes, if economies of scale are significant.
Also, monopoly profits may be necessary to “fuel” innovation (think of medical industry)
Is monopoly ever an advantage?
Yes, if economies of scale are significant.
Also, monopoly profits may be necessary to “fuel” innovation (think of medical industry)
Natural MonopolyNatural Monopoly
£
O Q
LRAC
MC
Industry Demand Curve DIndustry Demand Curve D
£
O Q
D
If two firms in the industry (A Duopoly) the demand curve for
each is DD
(half the market)
DD
Natural MonopolyNatural Monopoly
£
O Q
LRAC
MC
Since LRAC is always above AR no production occurs (in the long run)
NOTE: Decreasing LRAC, constant MC (big initial investment, but low “per
unit” costs)
DD
MR
Q0
Natural MonopolyNatural Monopoly
£
O Q
LRAC
MC
With one firm, however,
Qm
DD
Dm
Natural MonopolyNatural Monopoly
£
O Q
LRAC
MC
With one firm, however, equilibrium occurs at Qm
MR
Qm
Pm
Dm
Natural MonopolyNatural Monopoly
£
O Q
LRAC
MC
With one firm, however, equilibrium occurs at Qm
MR
Qm
Pm
Dm
Natural MonopolyNatural Monopoly
• Here with just two firms, no production at all Here with just two firms, no production at all
• But with monopoly production takes place But with monopoly production takes place that would not otherwise happen.that would not otherwise happen.
• There may be supernormal profits, but scale There may be supernormal profits, but scale of production allows lower cost and a of production allows lower cost and a (profitable) market price agents are willing (profitable) market price agents are willing to pay.to pay.
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