Perfect competition

Marginal Revenue Facing a Monopolist

Marginal Revenue Facing a Monopolist
(1) QUANTITY		(2) PRICE		(3) TOTAL REVENUE		(4) MARGINAL REVENUE
0		$11		0		-
1		10		$10		$10
2		9		18		8
3		8		24		6
4		7		28		4
5		6		30		2
6		5		30		0
7		4		28		-2
8		3		24		-4
9		2		18		-6
10		1		10		-8

Marginal Revenue Curve Facing a Monopolist

• For a monopolist, an increase in output involves not just producing more and selling it, but also reducing the price of its output to sell it.
• At every level of output except one unit, a monopolist’s marginal revenue is below price.

Marginal Revenue and Total Revenue

• A monopolist’s marginal revenue curve shows the change in total revenue that results as a firm moves along the segment of the demand curve that lies exactly above it.

Price and Output Choice for a Profit-Maximizing Monopolist

• Equilibrium conditions:
• MR = MC
• Slope of MR < Slope of MC

The Absence of a Supply Curve in Monopoly

• A monopoly firm has no supply curve that is independent of the demand curve for its product.
• A monopolist sets both price and quantity, and the amount of output supplied depends on both its marginal cost curve and the demand curve that it faces.

Price and Output Choices for a Monopolist Suffering Losses in the Short-Run

• It is possible for a profit-maximizing monopolist to suffer short-run losses.
• If the firm cannot generate enough revenue to cover total costs, it will go out of business in the long-run.

Perfect Competition and Monopoly Compared

• In a perfectly competitive industry in the long-run, price will be equal to long-run average cost. The market supply is the sum of all the short-run marginal cost curves of the firms in the industry.

Perfect Competition and Monopoly Compared

• Relative to a competitively organized industry, a monopolist restricts output, charges higher prices, and earns positive profits.

Collusion and Monopoly Compared

• Collusion is the act of working with other producers in an effort to limit competition and increase joint profits.
• When firms collude, the outcome would be exactly the same as the outcome of a monopoly in the industry.

The Social Costs of Monopoly

• Monopoly leads to an inefficient mix of output.
• Price is above marginal cost, which means that the firm is under producing from society’s point of view.

The Social Costs of Monopoly

• The triangle ABC measures the net social gain of moving from 2,000 units to 4,000 units (or welfare loss from monopoly).

Rent-Seeking Behavior

• Rent-seeking behavior refers to actions taken by households or firms to preserve positive profits.
• A rational owner would be willing to pay any amount less than the entire rectangle PmACPc to prevent those positive profits from being eliminated as a result of entry.

Government Failure

• The idea of rent-seeking behavior introduces the notion of government failure, in which the government becomes the tool of the rent-seeker, and the allocation of resources is made even less efficient than before.

Public Choice Theory

• The idea of government failure is at the center of public choice theory, which holds that public officials who set economic policies and regulate the players act in their own self-interest, just as firms do.

Natural Monopoly

• A natural monopoly is an industry in which advantages of large scale production make it possible for a single firm to produce the entire output of the market at lower average cost than a number of firms, each producing a smaller quantity.

Natural Monopoly

• With one firm producing 500,000 units, average cost is $1 per unit. With five firms each producing 100,000 units, average cost is $5 per unit.

• Thank You