14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22

Size: px

Start display at page:

Download "14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22"

Lionel Greene
7 years ago
Views:

1 Monopoly. rinciples of Microeconomics, Fall 7 Chia-Hui Chen November 7, 7 Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side of the market and has complete control over the amount offered for sale; the monopolist controls price but must operate along consumer demand.. Revenue in Monopoly Review the revenue in perfect competition: Revenue of monopolist is also R = (.) AR = =. (.) R = (), but changes with because the monopolist faces the whole market demand and his quantity supplied affects the market price. Then the average revenue is and the marginal revenue is R AR = = (); dr d() d = = = () +. d d d The relation between and is determined by the demand curve (see Figure ). Since d <, d < (). Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

2 . Output Decision in Monopoly Example (A Demand Function). Suppose the price is = D, where D is the quantity demanded. Calculate the average revenue and the marginal revenue: AR = = ; d = p + =. d Demand Curve Figure : Demand and Supply of Monopolist.. Output Decision in Monopoly The monopolist will maximize its profit π() = R() C(), which is the difference of revenue and cost. When maximized, namely, dπ dr dc = =, d d d =, so the monopolist would choose this point to produce; because >, Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

3 .3 Lerner s Index 3 The profit equals to (see Figure ). >. (AR AC) = ( AC) * AR Demand Curve AC * Figure : Output Decision of Monopolist..3 Lerner s Index Rewrite the marginal revenue: d d = + = + ( ) = +. d d E D The monopolist chooses to produce the quantity where Thus, = = +. E D =, (.3) E D which is the makeup over as a percentage of price; this fraction is less than. L = measures the monopoly power of a firm and is called Lerner s index. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

4 Shift in Demand and Effect of Tax In a competitive market, and the makeup is zero. =, In a monopolistic market, Comments: and the makeup is larger than zero. <,. The makeup increases with the inverse of demand elasticity.. The larger the demand elasticity, the less profitable it is to be a monopolist (see Figure 3 and ). 3. A monopolist never produces a quantity at the inelastic portion of demand curve, since the makeup right hand side of Equation.3 is less than one * D 3 * Figure 3: Inelastic Demand. Shift in Demand and Effect of Tax Compare the competitive market and the monopolistic markets. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

5 . Supply Curve of Competitive Market and Monopolistic Markets * D 3 * Figure : Elastic Demand.. Supply Curve of Competitive Market and Monopolistic Markets The supply curve in competitive markets is determined by, and there is no supply curve for monopolistic markets.. Shift in Demand In competitive markets, when demand shifts, the changes in price and quantity has a positive relation, namely, if the price raises, the quantity increases. In monopolistic markets, when the demand shifts, it may be the case that only price changes (see Figure ), only quantity changes (see Figure 6), or both change..3 Effect of Tax In competitive marketes, buyer s prices raise less than the tax, and the burden is shared by roducers and Consumers; in monopolistic markets, the price might raise more than tax (see Figure 7). Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

6 .3 Effect of Tax 6 AR AR = Figure : Only rice Change in Monopoly. AR = AR Figure 6: Only uantity Change in Monopoly. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

7 .3 Effect of Tax D = +T Figure 7: rice Might Raise More than Tax. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall 7. MIT

Monopoly and Monopsony

Multi-lant Firm. rinciples of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly and Monopsony Outline. Chap : Multi-lant Firm. Chap : Social Cost of Monopoly ower. Chap : rice Regulation. Chap