1. mark_holmes@unc.edu-Monopoly Monopolies Mark Holmes

2. mark_holmes@unc.edu-Monopoly Definition of Monopoly One firm in the industry Unique good No entry Firm is price maker Examples: AT&T, Standard Oil, Microsoft (?), US Postal Service

3. mark_holmes@unc.edu-Monopoly Price Maker Means Downward Sloping Demand Q P D As firm sells more, the price falls.

4. mark_holmes@unc.edu-Monopoly New concept: Marginal Revenue As sell more units, have to discount all the “previous” ones. Example: Moving from Q=1 to Q=2: Old: P=$10, sold 1 New:P=$9, sell 2 Lose $1 on the first unit (10-9) but make extra 9 (P) on the 2nd MR = -1 + 9 = 8 Suppose I sell aircraft carriers. There is a guy from the Defense Dept in the room. I can sell one carrier for $1 billion, or 2 for $100 each. P  MR

5. mark_holmes@unc.edu-Monopoly MR, continued Why is MR< P? As you go to sell more units, you have to discount all the ones you sold so far. (It’s not an auction.) Q=2 to Q = 3: Lose $1 * 2 units Gain $8 on 3rd unit. Net = + $6 Formula:

6. mark_holmes@unc.edu-Monopoly Compare I can sell 3 units for $8...….or 4 units for $7. Unit A Unit B Unit C Unit D $8 + $8 ----- $24 $7 + $7 ----- $28 + -1 + $7 ----- $4 Marginal

7. mark_holmes@unc.edu-Monopoly Golden Rule The best profit Q>0 is the largest Q where MR=MC. How important is something called the “Golden Rule”?

8. mark_holmes@unc.edu-Monopoly Practice Problem: MR For the following, compute TR and MR. Sketch D and MR. More on webpage http://www.unc.edu/~gholmes/econ10http://www.unc.edu/~gholmes/econ10

9. mark_holmes@unc.edu-Monopoly The Skinny on MR Explain why MR<P Explain why MR falls as Q increases Know the formula for MR Why do we care about MR versus P? Consider the aircraft carrier story. At P=$100, QD=1 At P = $75, QD=2 At P = $50, QD=3 Suppose marginal cost = $50. Are you better off at Q=2 or Q=3? ==>MR = $100, TR = $100, TP=$50 ==>MR = $50, TR = $150, TP=$50 ==>MR = $0, TR = $150, TP=$0

10. mark_holmes@unc.edu-Monopoly Graphs of D and MR Q P Given a linear demand curve (the only kind in this class), the MR curve lies beneath D, twice as steep, and halfway between D and the P axis. D MR

11. mark_holmes@unc.edu-Monopoly Why? (for calculus folks) Strictly for fostering intellectual climate Linear demand Same intercept, twice the slope (2b). Algebra gives you halfway between.

12. mark_holmes@unc.edu-Monopoly Monopoly: Generic Cost Curves Q $ AVC ATC MC

13. mark_holmes@unc.edu-Monopoly Monopoly: Generic Demand and MR curves Q $ D MR

14. mark_holmes@unc.edu-Monopoly Monopoly: Condition I Q $ AVC ATC MC D MR Where does MR=MC? q* What is the price?

15. mark_holmes@unc.edu-Monopoly Monopoly: Condition I Q $ AVC ATC MC D MR q* If the price is here.....are we in eq? What if price is here?

16. mark_holmes@unc.edu-Monopoly Lesson (an easy one to forget) Q $ AVC ATC MC D MR q* The firm goes up to D from the q* where MR=MC.

17. mark_holmes@unc.edu-Monopoly TR Monopoly: Condition I Q $ AVC ATC MC D MR q* The rest is the same as Perfect Competition... TC Profit

18. mark_holmes@unc.edu-Monopoly Monopoly: Condition II Q $ AVC ATC MC D MR Where does MR=MC? What is P?

19. mark_holmes@unc.edu-Monopoly TC Monopoly: Condition II Q $ AVC ATC MC D MR TR LOSS

20. mark_holmes@unc.edu-Monopoly TFC Monopoly: Condition II Q $ AVC ATC MC D MR LOSS TFC>loss Don’t shut down

21. mark_holmes@unc.edu-Monopoly TR Monopoly: Condition III Q $ AVC ATC MC D MR TC LOSS

22. mark_holmes@unc.edu-Monopoly Monopoly: Condition III Q $ AVC ATC MC D MR LOSS TFC TFC<LOSS Shut down

23. mark_holmes@unc.edu-Monopoly Tables Back to the tables. We can compute TVC, TC, etc. Now we need to add TR and MR. Here, MR=MC at Q=400. Profit = 12,000-12,600 = -600. This is a smaller loss than TFC, so don’t shut down.

24. mark_holmes@unc.edu-Monopoly Monopoly: Condition II Q $ AVC ATC MC D MR TC TR LOSS

25. mark_holmes@unc.edu-Monopoly Let’s do one

26. mark_holmes@unc.edu-Monopoly Graph Q $ AVC ATC MC D MR

27. mark_holmes@unc.edu-Monopoly Does this make sense? Q $ AVC ATC MC D MR

28. mark_holmes@unc.edu-Monopoly Your Turn Compute best profit Q>0 Profit/loss Does firm want to shut down? Sketch Also: Sketch a monopolist - with zero profits. - indifferent about shutting down.