Market Power: Monopoly

Topics to be Discussed: Monopoly, Monopoly Power, Sources of Monopoly Power, The Social Costs of Monopoly Power | Chapter 10 Market Power: Monopoly Topics to be Discussed Monopoly Monopoly Power Sources of Monopoly Power The Social Costs of Monopoly Power Chapter 10 Slide 2 Perfect Competition Review of Perfect Competition z P = LMC = LRAC z Normal profits or zero economic profits in the long run z Large number of buyers and sellers z Homogenous product z Perfect information z Firm is a price taker Chapter 10 Slide 3 Perfect Competition PPMarket Individual Firm DS LMC LRAC P0 P0 D = MR = P q Q0 Q 0 Q Monopoly Monopoly 1) One seller - many buyers 2) One product (no good substitutes) 3) Barriers to entry Chapter 10 Slide 5 Sources of Monopoly Power Why do some firm’s have considerable monopoly power, and others have little or none? A firm’s monopoly power is determined by the firm’s elasticity of demand. Chapter 10 Slide 6 Sources of Monopoly Power The firm’s elasticity of demand is determined by: 1) Elasticity of market demand 2) Number of firms 3) The interaction among firms Chapter 10 Slide 7 Monopoly The monopolist is the supply-side of the market and has complete control over the amount offered for sale. Profits will be maximized at the level of output where marginal revenue equals marginal cost. Chapter 10 Slide 8 Monopoly Finding Marginal Revenue z As the sole producer, the monopolist works with the market demand to determine output and price. z Assume a firm with demand: P = 6 - Q Chapter 10 Slide 9 Total, Marginal, and Average Revenue Total Marginal Average Price Quantity Revenue Revenue Revenue PQ RMRAR $6 0 $0 --- --- 51 5$5$5 42 83 4 33 91 3 24 8-12 15 5-31 Chapter 10 Slide 10 Average and Marginal Revenue $ per 7 unit of output 6 5 4 Average Revenue (Demand) 3 2 Marginal 1 Revenue 0 1234567Output Chapter 10 Slide 11 Monopoly Observations 1) To increase sales the price must fall 2) MR < P 3) Compared to perfect competition No change in price to change sales MR = P Chapter 10 Slide 12 Monopoly Monopolist’s Output Decision 1) Profits .