Transcript Monopoly

Market Structure
Monopoly
Monopoly
$
MC
P*
D
MR
Q*
Q
Production and Output
P
$10
9
8
7
6
5
4
3
Q
0
1
2
3
4
5
6
7
8
TR
MR
TC
MC
Profit
$10
18
24
28
30
30
28
24
$10
8
6
4
2
0
-2
-4
$3
5
8
12
17
23
30
38
$1
2
3
4
5
6
7
8
$7
13
16
16
13
7
-2
-14
Elasticity of Demand and Output
h=(∆Q/Q)/(∆P/P)=(∆Q/∆P)*(P/Q)
∆P=(Px∆Q)/(Qxh)
How much you have to change the price to sell exactly
one additional unit (∆Q=1)?
|∆P|=P/(Qx|h|)
What is the change in revenue if you sell an additional
unit?
MR=P- |∆P|xQ
MR=P- (P/(Qx|h|))xQ=P(1-1/|h|)
MR=P(1-1/|h|)
The monopoly always operate on the elastic part (|h|>1)
of the demand curve (otherwise the MR is negative)
Example
Suppose that if the price is $10 the quantity of
cars demanded is 10. If the price is $9 the
quantity of cars demanded is 11.
Total revenues change when reducing the price
from $10 to $9 because:
1. you make ($9) for selling an additional car.
2. You now sell for $9 each of the 10 cars you
were selling for $10. You make -$10.
Therefore the marginal revenue in this example
is -1 ($9-$10).
Elasticity of Demand and Output
If the monopoly increases the price, revenues
must fall.
Suppose you find that the increase in price of gas
led to an increase in revenues.
This would be evidence that the gas market is not
a monopoly.
A monopoly does not have to wait for a disaster
that increases costs to increase prices.
Monopoly and Welfare
$
MC
A
B
Pm
C
Pc
D E
G H
F
D
MR
Qm
Qc
Q
Consumers’
Surplus
Producers’
Surplus
Social Gain
Deadweight
Loss
Competition
Monopoly
A+B+C+D+E
A+B
F+G+H
C+D+F+G
A+B+C+D+E+F A+B+C+D+F+G
+G+H
E+H
Monopoly and Price Ceiling
$
A price ceiling eliminates the
deadweight loss
MC
P*
Pc
D
MR
Qm
Qc
Q