Chapter 5 & Main Monopoly Chapter 5 & Main Monopoly

REVENUE Revenue curves when price varies with output (downward-sloping demand curve)

Revenues for a firm facing a downward sloping demand curve

REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR)

Q (units) P =AR (£) TR (£) MR (£) AR MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

Why is the MR curve below the Demand Curve To differentiate P.Q we use the product rule. Let u=P and v=Q

Why is the MR curve below the Demand Curve?

MR = AR + something negativeMR = AR + something negative

Q (units) P =AR (£) TR (£) MR (£) AR MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

TR curve for a firm facing a downward-sloping D curve Quantity TR (£) Now to sell more have to lower price So gain from additional sales has to be weighed against lower price on all goods. At some point Revenue will be maximized TR

TR curve for a firm facing a downward-sloping D curve Quantity TR (£) Quantity (units) P = AR (£) TR (£)

TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) Quantity (units) P = AR (£) TR (£)

TR curve for a firm facing a downward-sloping D curve For a maximum, derivative of TR function must be equal to Marginal costs

TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) MR

MONOPOLY Essential Characteristics of the monopolist's demand curve – –downward sloping – –MR below AR

£ Q O MR AR Profit maximising under monopoly

£ Q O AC MC MR AR Profit maximising under monopoly

£ Q O MC QmQm MR MR=MC rule still applies Determines Q m

£ Q O MC AR QmQm MR AR a Profit maximising under monopoly Given MR=MC, we then find Price at Q m

£ Q O AC MC AR AC QmQm MR AR a b Profit maximising under monopoly..and profits?

MONOPOLY Defining monopoly Barriers to entry Natural monopoly Defining monopoly Barriers to entry Natural monopoly

MONOPOLY Defining monopoly Barriers to entry – –economies of scale – –product differentiation and brand loyalty – –lower costs for an established firm – –ownership or control over key factors – –ownership or control over outlets – –legal restrictions – –mergers and takeovers – –aggressive tactics – –intimidation Defining monopoly Barriers to entry – –economies of scale – –product differentiation and brand loyalty – –lower costs for an established firm – –ownership or control over key factors – –ownership or control over outlets – –legal restrictions – –mergers and takeovers – –aggressive tactics – –intimidation

MONOPOLY Disadvantages of monopoly – –high prices / low output Disadvantages of monopoly – –high prices / low output

£ Q O MC Q1Q1 MR AR = D P1P1 Equilibrium of industry under perfect competition and monopoly: with the same MC curve

£ Q O MC Q1Q1 MR P1P1 P2P2 Q2Q2 Equilibrium of industry under perfect competition and monopoly: with the same MC curve AR = D

£ Q O MC ( = supply under perfect competition) Q1Q1 MR P1P1 P2P2 Q2Q2 Equilibrium of industry under perfect competition and monopoly: with the same MC curve AR = D

MONOPOLY Disadvantages of monopoly – –high prices / low output: short run and long run Disadvantages of monopoly – –high prices / low output: short run and long run

MONOPOLY Is monopoly ever an advantage? Yes, if economies of scale are significant. Also, monopoly profits may be necessary to “fuel” innovation (think of medical industry) Is monopoly ever an advantage? Yes, if economies of scale are significant. Also, monopoly profits may be necessary to “fuel” innovation (think of medical industry)

Natural Monopoly £ O Q LRAC MC

Industry Demand Curve D £ O Q D If two firms in the industry (A Duopoly) the demand curve for each is D D (half the market) D

Natural Monopoly £ O Q LRAC MC Since LRAC is always above AR no production occurs (in the long run) NOTE: Decreasing LRAC, constant MC (big initial investment, but low “per unit” costs) D MR Q0Q0

Natural Monopoly £ O Q LRAC MC With one firm, however, QmQm D DmDm

Natural Monopoly £ O Q LRAC MC With one firm, however, equilibrium occurs at Q m MR QmQm PmPm DmDm

Natural Monopoly £ O Q LRAC MC With one firm, however, equilibrium occurs at Q m MR QmQm PmPm DmDm

Natural Monopoly Here with just two firms, no production at allHere with just two firms, no production at all But with monopoly production takes place that would not otherwise happen.But with monopoly production takes place that would not otherwise happen. There may be supernormal profits, but scale of production allows lower cost and a (profitable) market price agents are willing to pay.There may be supernormal profits, but scale of production allows lower cost and a (profitable) market price agents are willing to pay.