Monopoly

1. Monopoly Here we see what a monopoly is and its revenue potential.

2. Overview Monopoly means one seller. In perfect competition many sellers were price takers. Any one seller could not influence the price of the product in the market. The competitive firm could only choose what amount to sell. A monopoly firm will have to determine both how much to sell and at what price.

3. p $ Review S P=MR=D D Market Q Firm Q In a competitive market, the market demand curve represents the demand of all consumers in the market. At the equilibrium price in the market, the firm must merely sell what it wants at this price. The firm is a price taker and we say the demand for a firm is horizontal or perfectly elastic.

4. Monopoly For a monopoly firm the demand is the same as the market demand we see in competition. The demand is downward sloping to the right, what is called less than perfectly elastic. Since the monopolist is the only seller, it is natural they face the market demand curve. The situation of monopoly is often called imperfect competition.

5. Maximize profit Since the monopolist is the only seller in the market, the monopolist must decide what price to charge and how much to sell. When the monopolist sells, she is worried about profit. The goal is to maximize profit. But, in order to maximize profit, the pattern of revenues and costs at various output levels must be understood. The pattern of cost was the topic of an earlier chapter. Now we look at the pattern of revenue.

6. Market demand P In the market, the way consumers will take a greater quantity demanded is to have a lower price in the market. As an example, if the price in the market is 142, consumers will have a 142 132 Q 3 4 quantity demanded of 3. But the quantity demanded will be 4 when the price is 132.

7. Marginal revenue Marginal revenue is the change in total revenue when there is a change in output. Let’s continue with the example we introduced before. If the P = 142, Qd = 3 and TR = 426. If the P = 132, Qd = 4 and TR = 528. Thus, the marginal revenue(MR) of the 4th unit is 102. The price needed to get the 4th unit was 132, but the MR is only 102. Why the difference between P and MR? (It wasn’t like that for the competitive firm.)

8. Interpretation When the price is lowered from 142 to 132 the amount sold rises. In fact, the 4th unit sold brings in 132 in revenue. But this isn’t all we need to look at to have MR. Since the monopolist must sell to all consumers at the same price, the first 3 units now get sold at 132 as well. That means revenue on those three units will not included 10 per unit when the price is lowered. Continuing with the example, MR(of the 4th unit) = 132 - (142-132) 3 = 102

9. interpretation P 142 area c is the gain in revenue from selling more area a is the loss in revenue from selling at a lower price. a 132 b c Q 3 4 Area a + b = 142 times 3 = 426 = TR when P = 142 Area b + c = 132 times 4 = 528 = TR when P = 132 MR = c - a = 132 - (142-132)(3) = 102

10. Let’s do another example When P = 132, Qd = 4. When P = 122, Qd = 5. When P = 132, TR = ................... When P = 122, TR = ................... So the 5th unit is sold when P = 122, but the MR of the 5th unit = ........................................... Again we see P>MR.

11. MR from areas to height P In the above diagram we think of MR as area c - a and we get a number. a In the bottom graph we can think of the number as a height. Note still the MR is lower than the price on the demand curve. On the next screen we will see the whole MR curve. D b c Q P height = MR D Q

12. Monopoly MR in a graph $ I do not have a proof for you, but you can see in this diagram that MR is also a straight line that starts at the same place as demand in the upper left, but is always below demand because P>MR. Like at Q = 4, MR = 102 and P = 132. 132 102 D Q 4 Note that a good way to draw in MR is to first draw demand and then put MR through the Q axis halfway out to the demand curve. I put an X at that point.