Ch24-Monopoly.ppt

Chapter Twenty-Four,Monopoly,Pure Monopoly,A monopolized market has a single seller.The monopolists demand curve is the(downward sloping)market demand curve.So the monopolist can alter the market price by adjusting its output level.,Pure Monopoly,Output Level,y,$/output unit,p(y),Higher output y causes alower market price,p(y).,Why Monopolies?,What causes monopolies?a legal fiat;e.g.US Postal Service,Why Monopolies?,What causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drug,Why Monopolies?,What causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drugsole ownership of a resource;e.g.a toll highway,Why Monopolies?,What causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drugsole ownership of a resource;e.g.a toll highwayformation of a cartel;e.g.OPEC,Why Monopolies?,What causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drugsole ownership of a resource;e.g.a toll highwayformation of a cartel;e.g.OPEClarge economies of scale;e.g.local utility companies.,Pure Monopoly,Suppose that the monopolist seeks to maximize its economic profit,What output level y*maximizes profit?,Profit-Maximization,At the profit-maximizing output level y*,so,for y=y*,y,$,R(y)=p(y)y,Profit-Maximization,$,R(y)=p(y)y,c(y),Profit-Maximization,y,Profit-Maximization,$,R(y)=p(y)y,c(y),y,P(y),Profit-Maximization,$,R(y)=p(y)y,c(y),y,P(y),y*,Profit-Maximization,$,R(y)=p(y)y,c(y),y,P(y),y*,Profit-Maximization,$,R(y)=p(y)y,c(y),y,P(y),y*,Profit-Maximization,$,R(y)=p(y)y,c(y),y,P(y),y*,At the profit-maximizingoutput level the slopes ofthe revenue and total costcurves are equal;MR(y*)=MC(y*).,Marginal Revenue,Marginal revenue is the rate-of-change of revenue as the output level y increases;,Marginal Revenue,Marginal revenue is the rate-of-change of revenue as the output level y increases;,dp(y)/dy is the slope of the market inversedemand function so dp(y)/dy 0.Therefore,for y 0.,Marginal Revenue,E.g.if p(y)=a-by then R(y)=p(y)y=ay-by2and soMR(y)=a-2by 0.,Marginal Revenue,E.g.if p(y)=a-by then R(y)=p(y)y=ay-by2and soMR(y)=a-2by 0.,p(y)=a-by,a,y,a/b,MR(y)=a-2by,a/2b,Marginal Cost,Marginal cost is the rate-of-change of totalcost as the output level y increases;,E.g.if c(y)=F+ay+by2 then,Marginal Cost,F,y,y,c(y)=F+ay+by2,$,MC(y)=a+2by,$/output unit,a,Profit-Maximization;An Example,At the profit-maximizing output level y*,MR(y*)=MC(y*).So if p(y)=a-by andc(y)=F+ay+by2 then,Profit-Maximization;An Example,At the profit-maximizing output level y*,MR(y*)=MC(y*).So if p(y)=a-by and ifc(y)=F+ay+by2 then,and the profit-maximizing output level is,Profit-Maximization;An Example,At the profit-maximizing output level y*,MR(y*)=MC(y*).So if p(y)=a-by and ifc(y)=F+ay+by2 then,and the profit-maximizing output level is,causing the market price to be,Profit-Maximization;An Example,$/output unit,y,MC(y)=a+2by,p(y)=a-by,MR(y)=a-2by,a,a,Profit-Maximization;An Example,$/output unit,y,MC(y)=a+2by,p(y)=a-by,MR(y)=a-2by,a,a,Profit-Maximization;An Example,$/output unit,y,MC(y)=a+2by,p(y)=a-by,MR(y)=a-2by,a,a,Monopolistic Pricing&Own-Price Elasticity of Demand,Suppose that market demand becomes less sensitive to changes in price(i.e.the own-price elasticity of demand becomes less negative).Does the monopolist exploit this by causing the market price to rise?,Monopolistic Pricing&Own-Price Elasticity of Demand,Monopolistic Pricing&Own-Price Elasticity of Demand,Own-price elasticity of demand is,