Chapter 8

Market Power:Monopoly and Monopsony

What is Monopsony?

• Mono = means “One” +• Psony = means “Buyer” =• One Buyer or One Consumer

Monopsony

Monopsony Power

Monopsony Power

Monopsony (example 1)

Monopsony (example 1… cont)

Monopsony (example 2)

Monopsony (example 2 …cont)

Monopoly

• While a Competitive firm is a price taker, a monopoly firm is a price maker.

• One seller and many buyers: Implication: the seller is a price maker and

the buyers are price takers.• A firm is considered a monopoly if:1. It is the sole seller of its product.2. Its product does not have close substitutes.

Quiz #1

• Assuming the competitive market price of a good is $22 and the firm’s total cost is:

TC= 100 + 2Q + 0.1Q21. What is the ideal quantity to be produced to

maximize profit?2. What is the firms Profit at the ideal quantity?

Solution to Quiz #1

• In Perfectly competitive market:• P = MC• MC= d(TC)/d(Q)=2 + 0.2Q• MC= 2 + 0.2Q• P= 2 + 0.2Q• 22 = 2 + 0.2Q• Ideal Quatity = 20/0.2 = 100• TR= 100*22 = $2200• TC= 100 + 2(100) + 0.1(100*100) = $1300• Profit = TR – TC = 2200 – 1300= $900

Quiz #2

• In a perfect competitive market we have the following curves for demand and supply.

• Qd= 100 – 5P• Qs= 25P – 200• The firm’s marginal cost is MC = Q - 20• How much output does this firm has to

produce in order to maximize its profit?

Solution to Quiz #2

• First we find the equilibrium price:• 100 – 5P = 25P – 200• 30P = 300• P = $10• In a competitive market P=MC• 10 = Q - 20• Q = 30