Economics 101: Principles of Economics

1. Economics 101: Principles of Economics • Questions? • Read Ch. 16 (Oligopoly) • Read Ch. 20 (Income Inequality and Poverty) • Discuss Lorenz curves and Gini coefficient calculations • Market shares at http://www.adage.com/page.cms?pageId=936

2. Monopoly Price and Elasticity of Demand $ • How does a monopolist determine what price to charge and how much output to produce? 1. Trial and error, but mistakes cost 2. Utilize the following relationship: MR = P ( 1 + 1/) which becomes P = MC / [1 + 1/] when MR = MC. • Recall that TR = area B - area A TR = P(Q) - Q(P) [now  by Q] TR / Q  MR = P - Q(P/Q) Recall that  = (Q/P)(P/Q). [now  and * by P] MR = P[(P/P) - (Q/P)*(P/Q)] = P[ 1 - (1 / ) ] • Note that this is for |  | • MR = P[ 1 + (1 / ) ] , if just use  Total curves TC TR  Output 0 Qm* $/unit Per-unit curves MC Pm* ATC  D = AR MR Qm* Output

3. More on Monopolists • Monopolist has no “supply curve” (no unique relationship between P & Q) • Why? Because Pmon & Qmon depend on MC & MR (from D) • Monopolists don’t always make big  •  < 0 if LAC is above D curve • can charge a P > MC, but can’t force sale • Patented items may not go to market • Inefficiency of monopoly • Produces “too little” output DWL • Government responses • Increase competition • Regulation • Create public enterprise • Do nothing $/unit LAC<0 MC LAC>0 D = AR MR Q Q1