1. Chapter 5

2. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) – –revenue curves and price elasticity of demand Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) – –revenue curves and price elasticity of demand

3. Revenues for a firm facing a downward sloping demand curve

4. 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)

5. TR at P=6, Q = 3 is 18TR at P=6, Q = 3 is 18 TR at P=5, Q = 4 is 20TR at P=5, Q = 4 is 20 So MR = 2So MR = 2 Alternative Story:Alternative Story: Gain from selling one more unit = 5Gain from selling one more unit = 5 But now have reduced price from 6 to 5 on the first three units sold.But now have reduced price from 6 to 5 on the first three units sold. So losing 3*£1=£3 as a resultSo losing 3*£1=£3 as a result MR = price of extra unit (5) less price reduction on all units sold previously (3) = 5 – 3 = 2MR = price of extra unit (5) less price reduction on all units sold previously (3) = 5 – 3 = 2

6. Q (units) 12345671234567 P =AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 MR (£) 6 4 2 0 -2 -4 AR MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

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

8. AR MR Elasticity = -1 Elastic Inelastic AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

9. £ Q O AC MC MR AR Profit maximising under monopoly

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

11. £ Q O AC MC MR AR Profit maximising under monopoly

12. £ Q O P0P0 QmQm a b What is the supply curve for the monopolist? P1P1 The Supply Curve is a unique relationship between Price and Quantity Here we found that monopolist will supply the same amount at two different prices So no Supply Curve

13. 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 Natural 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 Natural monopoly

14. Natural Monopoly £ O Q LRAC Long –Run average cost curve is downward sloping When will this occur? If there are large Fixed Costs and small MC MC

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

16. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale

17. Natural Monopoly £ O Q LRAC MC

18. Industry Demand Curve £ O Q D If two firms in the industry (A Duopoly) the demand curve for each is D 1 P max At prices above P max competitor gets all the business D

19. An alternative version of the story is to examine an industry where the cost curve an individual firm faces falls as the scale of production rises. SO now we are going to examine the Equilibrium of industry under perfect competition and monopoly: with different MC curves

20. £ Q O MC ( = supply) perfect competition MR Q2Q2 MC monopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves P 2 =MR. =MC

21. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 P2P2 Q2Q2 MC monopoly P3P3 AR = D Suppose a regulator set the price at P 3 (Average Cost Pricing). How would this effect the behaviour of the monopolists? AC

22. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale – –profits can be used for investment (dodgy!!) – –promise of high profits encourages risk taking (Still a bit dodgy – what is appropriate risk taking?) Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale – –profits can be used for investment (dodgy!!) – –promise of high profits encourages risk taking (Still a bit dodgy – what is appropriate risk taking?)