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

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

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

4. 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

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

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

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

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

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

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

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

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

13. 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)

14. 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.

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

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

17. 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 .

18. Managing with Multiple Plants Introducing New Technologies

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

20. 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

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

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

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

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

25. 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

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

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

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

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

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

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

32. Managing with Multiple Plants End ©2003 Charles W. Upton

33. Managing with Multiple Plants End ©2003 Charles W. Upton