Chapter 5 & 6.2.1 Main Monopoly Chapter 5 & 6.2.1 Main Monopoly.

Chapter 5 & 6 .2.1Main Monopoly

Chapter 5 & 6 .2.1Main Monopoly

REVENUEREVENUE

• 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


– average revenue (AR)


– 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


Quantity

TR

(£

)

Quantity(units)

1234567

P = AR(£)

8765432

TR(£)

8141820201814

0

4

8

12

16

20

0 1 2 3 4 5 6 7


TR

Quantity

TR

(£

)

Quantity(units)

1234567

P = AR(£)

8765432

TR(£)

8141820201814


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


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



£

Q O

MC

Qm

MR

MR=MC rule still applies

Determines Qm

£

Q O

MC

AR

Qm

MR

AR

a


Given MR=MC, we

then find Price at Qm

£

Q O

AC

MC

AR

AC

Qm

MR

AR

a

b


..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


AR = D

£

Q O

MC ( = supply under perfect competition)

Q1

MR

P1

P2

Q2


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


£

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


£

O Q

LRAC

MC

With one firm, however,

Qm

DD

Dm


£

O Q

LRAC

MC

With one firm, however, equilibrium occurs at Qm

MR

Qm

Pm

Dm


£

O Q

LRAC

MC

With one firm, however, equilibrium occurs at Qm

MR

Qm

Pm

Dm


• 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.

Chapter 5 & 6.2.1 Main Monopoly Chapter 5 & 6.2.1 Main Monopoly.

Documents

ar mr ar

tr slide

q slide

tr curve

mc curve slide

mr quantity ar

sloping mr

sloping d curve slide