Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
L-12, MM Pure Monopoly Characteristics 1. Only one supplier in the industry 2. Product is unique (no close substitutes) 3. Entry is extremely difficult or prohibited by law Examples The monopolist faces the industry demand curve, which is downward sloping. P D of the industry Q Monopolist is a price “maker”--- it can “set” the price along the demand curve. It chooses a point (price and quantity combination) along the demand curve to maximize its profit The Monopolist’s supply decision 1 Total revenue =PXQ Marginal Revenue is the addition to the total revenue resulting from one more unit of sale of the product. ∆ TR MR = ------------------∆ Q Demand and revenues for Viagra, a monopolist product Quantity Price Total Revenue Marginal (10million) ($) ($) Revenue ($) PXQ 1 15 15 2 14 28 13 3 13 39 11 4 12 48 9 5 11 55 7 6 10 60 5 7 9 63 3 8 8 64 1 9 7 63 -1 10 6 60 -3 2 Demand and Marginal Revenue for Viagra, A monopolist product 16 14 Demand Marginal revenue 12 10 8 $ 6 4 2 0 -2 1 2 3 4 5 6 7 8 9 10 -4 Quantity If the demand curve is a downward sloping straight line, then the marginal revenue curve is a line below the demand curve. Profit Maximization Quantity Price (10million) ($) 1 2 3 4 5 6 7 8 9 10 15 14 13 12 11 10 9 8 7 6 Marginal Revenue ($) Marginal Cost ($) 13 11 9 7 5 3 1 -1 -3 14 7 2 1 1.5 2 3 4 5 6 3 If MR > MC, it pays for the firm to expand the production If MR < MC, it pays for the firm to reduce production. Insight. P MC P D 0 Q Q* MR The rule for profit maximization for the monopolist MR = MC The monopolist charges the price at P, where Q* intersects the demand curve. The Mark-up by the monopolist P > MC 4 Monopoly profit (Monopoly rent) P MC ATC Monopoly profit (rent) P D 0 Q Q* MR A monopolist is protected by high barriers of entry 5 The case against the monopoly 1. restricting the output and raise the price 2. restricting entry and keep the high monopoly price in the long run 3. not producing at the minimum ATC 4. not producing at the point MU = MC, resulting in efficiency loss or economic welfare loss. P MC ATC P D = MU 0 Q Q* MR Anti-trust and anti-monopoly law Sherman Act 6