Embed Size (px)
Citation preview
Chapter 9
Market Power:Monopoly and
Monopsony
Market Power:Monopoly and
MonopsonySlide 1Chapter 9
Chapter 9 Slide 2
Perfect Competition
Review of Perfect CompetitionP = LMC = LRACNormal profits or zero economic profits in
the long runLarge number of buyers and sellersHomogenous productPerfect information
Perfect Competition
Q Q
P PMarket Individual FirmD S
Q0
P0 P0
MR = P
q0
LRACLMC
Slide 3Chapter 9
Chapter 9 Slide 4
Monopoly
Monopoly
1) One seller - many buyers
2) One product (no good substitutes)
Chapter 9 Slide 5
Monopoly
The monopolist is the supply-side of the market and has complete control over the amount offered for sale.
Profits will be maximized at the level of output where marginal revenue equals marginal cost.
Chapter 9 Slide 6
Monopoly
Finding Marginal RevenueAs the sole producer, the monopolist works
with the market demand to determine output and price.
Assume a firm with demand:P = 6 - Q
Chapter 9 Slide 7
Total, Marginal, and Average Revenue
$6 0 $0 --- ---
5 1 5 $5 $5
4 2 8 3 4
3 3 9 1 3
2 4 8 -1 2
1 5 5 -3 1
Total Marginal AveragePrice Quantity Revenue Revenue Revenue
P Q R MR AR
Chapter 9 Slide 8
Average and Marginal Revenue
Output0
1
2
3
$ perunit ofoutput
1 2 3 4 5 6 7
4
5
6
7
Average Revenue (Demand)
MarginalRevenue
Chapter 9 Slide 9
Monopoly
Observations
1) To increase sales the price must fall
2) MR < P
3) Compared to perfect competitionNo change in price to change salesMR = P
Chapter 9 Slide 10
Monopoly
Monopolist’s Output Decision
1) Profits maximized at the output level where MR = MC
2) Cost functions are the same
MRMCor
MRMCQCQRQ
QCQRQ
0///
)()()(
Chapter 9 Slide 11
Maximizing Profit When Marginal Revenue Equals Marginal Cost
At output levels below MR = MC the decrease in revenue is greater than the decrease in cost (MR > MC).
At output levels above MR = MC the increase in cost is greater than the decrease in revenue (MR < MC)
The Monopolist’s Output DecisionThe Monopolist’s Output Decision
Chapter 9 Slide 12
Lostprofit
P1
Q1
Lostprofit
MC
AC
Quantity
$ perunit ofoutput
D = AR
MR
P*
Q*
Maximizing Profit When Marginal Revenue Equals Marginal Cost
P2
Q2
Chapter 9 Slide 13
Monopoly
An Example
CMC
QQCCost
2
50)( 2
The Monopolist’s Output DecisionThe Monopolist’s Output Decision
Chapter 9 Slide 14
Monopoly
An Example
RMR
QQQQPQR
QQPDemand
240
40)()(
40)(2
The Monopolist’s Output DecisionThe Monopolist’s Output Decision
Chapter 9 Slide 15
Monopoly
An Example
30 10,When
10
2240
P Q
Q
QQorMCMR
The Monopolist’s Output DecisionThe Monopolist’s Output Decision
Chapter 9 Slide 16
Monopoly
An ExampleBy setting marginal revenue equal to
marginal cost, it can be verified that profit is maximized at P = $30 and Q = 10.
This can be seen graphically:
The Monopolist’s Output DecisionThe Monopolist’s Output Decision
Chapter 9 Slide 17
Example of Profit Maximization
Observations Profits are maximized at
10 units P = $30, Q = 10,
TR = P x Q = $300 AC = $15, Q = 10,
TC = AC x Q = 150 Profit = TR - TC
$150 = $300 - $150
Quantity
$
0 5 10 15 20
100
150
200
300
400
50
R
C
Profits
t
t'
c
c
Chapter 9 Slide 18
Example of Profit Maximization
Observations AC = $15, Q = 10,
TC = AC x Q = 150
Profit = TR - TC = $300 - $150 = $150 or
Profit = (P - AC) x Q = ($30 - $15)(10) = $150
Quantity
$/Q
0 5 10 15 20
10
20
30
40
15
MC
AR
MR
ACProfit
Chapter 9 Slide 19
Monopoly
A Rule of Thumb for PricingWe want to translate the condition that
marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice.
This can be demonstrated using the following steps:
Chapter 9 Slide 20
A Rule of Thumb for Pricing
PQ
QPE
Q
P
P
QPP
Q
PQPMR
Q
PQ
Q
RMR
d.3
.2
)(.1
Chapter 9 Slide 21
A Rule of Thumb for Pricing
d
d
EPPMR
EQP
PQ
1.5
1.4
Chapter 9 Slide 22
A Rule of Thumb for Pricing
D
DD
E11
MCP
EE
1P P
MC MR @ maximized is
1
.6
Chapter 9 Slide 23
= the markup over MC as a percentage of price (P-MC)/PdE
1.7
A Rule of Thumb for Pricing
8. The markup should equal the inverse of the elasticity of demand.
Chapter 9 Slide 24
A Rule of Thumb for Pricing
12$75.
9
411
9
94
119
.
P
MCE
Assume
E
MCP
d
d
Chapter 9 Slide 25
Monopoly
Monopoly pricing compared to perfect competition pricing:Monopoly
P > MC
Perfect Competition
P = MC
Chapter 9 Slide 26
Monopoly
Monopoly pricing compared to perfect competition pricing:The more elastic the demand the closer
price is to marginal cost.
If Ed is a large negative number, price is close to marginal cost and vice versa.
Chapter 9 Slide 27
Monopoly
The Effect of a TaxUnder monopoly price can sometimes rise
by more than the amount of the tax.
To determine the impact of a tax:t = specific tax
MC = MC + t
MR = MC + t : optimal production decision
Chapter 9 Slide 28
Effect of Excise Tax on Monopolist
Quantity
$/Q
MC AR
MR
Q0
P0 MC + tax
t
Q1
P1
P
Increase in P: P0P1 > increase in tax
![[EM-Sofyan] Monopoly and Monopsony Market](https://img.dokumen.tips/doc/110x75/554f1370b4c905723a8b47c1/em-sofyan-monopoly-and-monopsony-market.jpg)
