Post on 14-Mar-2016
description
exists when a single firm is the sole producer of a product for which there are no close substitutes.
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1. Economies of scale
2. Legal barriers
3. Ownership or control of resources
4. Strategic barriers
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Occurs when lowest unit costs depend on the existence of a small number of larger firms or one firm.◦ New firms cannot afford to enter the market
◦ Public utilities
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International Nickel Co. of Canada controlled 90% of world’s nickel reserves.
Professional sports leagues control player contract and leases on major city stadiums.
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3 assumptions
1. Monopoly is secured by patents, economies of scale, or resource ownership.
2. firm is not regulated by government.
3. a single‑price monopolist
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Why?
monopolist must lower the price to sell an additional unit.
Added revenue will be price of last unit sold
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(1)QuantityOf Output
(2)Price
(AverageRevenue)
(3)Total
Revenue(1) X (2)
(4)MarginalRevenue
(5)Average
Total Cost(6)
Total Cost(1) X (5)
(7)Marginal
Cost(8)
Profit (+)or Loss (-)
0123456789
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$172162152142132122112102
928272
$0162304426528610672714736738720
$162142122102
826242222
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$190.00135.00113.33100.0094.0091.6791.4393.7597.78
103.00
$100190270340400470550640750880
1030
$90807060708090
110130150
$-100-28
+34+86
+128+140+122+74-14
-142-310
Revenue Data Cost Data
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Can you See Profit Maximization?11
LO 8.1 12
PP
DD
132132
When price decreases When price decreases from $142 to $132, one from $142 to $132, one more unit is sold…more unit is sold…
Gain = $132Gain = $132
$142$142
1 2 3 4 5 6 1 2 3 4 5 6
Revenue will increase by $132Revenue will increase by $132with the extra unit soldwith the extra unit sold
Figure 8-2
LO 8.1 13
1 2 3 4 5 6 1 2 3 4 5 6
PP
DD
but revenue lossbut revenue loss= $10 X 3 units= $10 X 3 units
Loss = $30Loss = $30
When price decreases When price decreases from $142 to $132, onefrom $142 to $132, onemore unit is sold…more unit is sold…
Gain = $132Gain = $132Marginal revenue Marginal revenue = $132-30= $132-30= $102 < $132 (price)= $102 < $132 (price)
132132$142$142
firm controls output and price
but is not free of market forces, since the combination of output and price that can be sold depends on demand.
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LO 8.1 16
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18QQ
Tota
l rev
enue
Tota
l rev
enue
Pric
e pe
r uni
tPr
ice
per u
nit
200
150
200
50
750
500
250 TRTR
DD
Inelastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18QQ
MRMR
Elastic
TRTR
Figure 8-3
Cannot charge the highest price it can get◦ Profits are max where MR = MC
Total profit is the goal◦ Not unit profit
Monopolists can receive economic profits greater than zero in the long run. ◦ Losses can also occur → shut down in LR
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