Lectures in Microeconomics-Charles W. Upton Managing with Multiple Plants

Handling Multiple Plants MC AC c min q min Suppose we have many plants with these MC and AC curves.

Managing with Multiple Plants The LRMC Curve MC AC c min q min Nq min LRMC SRMC

Managing with Multiple Plants The LRMC Curve MC AC c min q min Nq min LRMC SRMC LRMC is simply c min. SRMC is N x MC of existing plants

Managing with Multiple Plants A Change in Demand c min Q* P* D MR LRMC The initial situation

Managing with Multiple Plants Demand increases. How does the monopolist respond? Demand Increases c min Q* P* D MR LRMC

Managing with Multiple Plants Demand increases. How does the monopolist respond? Demand Increases c min Q* P* D MR LRMC SRMC

Managing with Multiple Plants Intersection of MC and MR changes New Equilibrium c min Q* P* D MR LRMC SRMC

Managing with Multiple Plants Price and Output Rise New Equilibrium c min Q* P* D MR LRMC SRMC

Managing with Multiple Plants New Plants! Expansion c min Q* P* D MR LRMC

Managing with Multiple Plants New MR=MC Expansion c min Q* P* D MR LRMC

Managing with Multiple Plants Lower Price, More Output Back to LRMC c min Q* P* D MR LRMC

Managing with Multiple Plants Summary c min Q* P* D MR LRMC Summary: increase in demand leads to higher price and output, as monopolist moves along SRMC. (Red to Green)

Managing with Multiple Plants Summary c min Q* P* D MR LRMC Monopolist builds new plants, returning to LRMC curve. (Green to Purple). As this happens, price falls and output rises.

Managing with Multiple Plants Change in Output c min Q* P* D MR LRMC Output> Output> Output

Managing with Multiple Plants Change in Price c min Q* P* D MR LRMC Output> Output> Output Price>Price Price> Price?

Managing with Multiple Plants But Which Way? c min Q* P* D MR LRMC Output> Output> Output Price>Price Price> Price? Maybe, maybe not. Depends on impact on .

Managing with Multiple Plants Introducing New Technologies

Managing with Multiple Plants The Initial Situation MC AC c min q min Initially, all plants are as shown. c min is LRMC.

Managing with Multiple Plants The Initial Situation MC AC c min q min Initially, all plants are as shown. c min is LRMC. If total output = Q, the monopoly operates N = Q/q min plants

Managing with Multiple Plants A New Technology MC AC c min q min MC AC q* min c* min q**

Managing with Multiple Plants A New Technology MC AC c min q min MC AC q* min c* min q** Lower MC! Lower AC!

Managing with Multiple Plants New LRMC MC AC c min q min MC AC q* min c* min q**

Managing with Multiple Plants Operating Level for Old Plants MC AC c min q min MC AC q* min c* min q**

Managing with Multiple Plants Operating Level for Old Plants MC AC c min q min MC AC q* min c* min q** Should old plants be abandoned? Not as long as c* min is above the minimum of AVC

Managing with Multiple Plants The Old Equilibrium c min Q* p* D MR LRMC

Managing with Multiple Plants New LRMC c min Q* p* D MR LRMC c* min LRMC

Managing with Multiple Plants The New Equilibrium c min Q* p* D MR LRMC c* min LRMC p** Q**

Managing with Multiple Plants Revenue Gain c min Q* p* D MR LRMC c* min LRMC p** Q** Lose the Grey, gain the Yellow

Managing with Multiple Plants Revenue Gain-2 c min Q* p* D MR LRMC c* min LRMC p** Q** The Net

Managing with Multiple Plants Profit Gain c min Q* p* D MR LRMC c* min LRMC p** Q** Cost Cutting Gains Revenue Gains

Managing with Multiple Plants End ©2003 Charles W. Upton

Managing with Multiple Plants End ©2003 Charles W. Upton