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Lecture Microeconomics: Chapter 11 - Besanko, Braeutigam

Chapter 11 - Monopoly and monopsony. This chapter presents the following content: the monopolist’s profit maximization problem, multi-plant monopoly and cartel production, the welfare economics and monopoly. | 1 Monopoly and Monopsony Chapter 11 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Eleven Overview The Monopolist’s Profit Maximization Problem The Profit Maximization Condition Equilibrium The Inverse Pricing Elasticity Rule 2. Multi-plant Monopoly and Cartel Production The Welfare Economics and Monopoly Chapter Eleven Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Eleven A Monopoly Definition: A Monopoly Market consists of a single seller facing many buyers. The monopolist's profit maximization problem: Max (Q) = TR(Q) - TC(Q) Q where: TR(Q) = QP(Q) and P(Q) is the (inverse) market demand curve. The monopolist's profit maximization condition: TR(Q)/ Q = TC(Q)/ Q MR(Q) = MC(Q) Copyright (c)2014 John Wiley & Sons, Inc. 4 Chapter Eleven A Monopoly – Profit Maximizing Along the demand curve, different revenues for different quantities Profit maximization problem is the optimal trade-off between volume (number of units sold) and margin (the differential between price). Monopolist’s demand Curve is downward-sloping Copyright (c)2014 John Wiley & Sons, Inc. 5 Chapter Eleven A Monopoly – Profit Maximizing Demand Curve: Total Revenue: Total Cost (Given): Profit-Maximization: MR = MC Copyright (c)2014 John Wiley & Sons, Inc. 6 Chapter Eleven A Monopoly – Profit Maximizing As Q increases TC increases, TR increases first and then decreases. Profit Maximization is at MR = MC Copyright (c)2014 John Wiley & Sons, Inc. 7 Chapter Eleven A Monopoly – Profit Maximizing MR>MC, firm can increase Q and increase profit MR