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Competition In Imperfect Markets. Profit Maximization By A Monopolist The monopolist must take account of the market demand curve: - the higher the price.

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Presentation on theme: "Competition In Imperfect Markets. Profit Maximization By A Monopolist The monopolist must take account of the market demand curve: - the higher the price."— Presentation transcript:

1 Competition In Imperfect Markets

2 Profit Maximization By A Monopolist The monopolist must take account of the market demand curve: - the higher the price it sets, the fewer units of its product it will sell. - the lower the price it sets, the more units it will sell.

3 Profit Maximization By A Monopolist (continued) Figure Page 405. The Monopolists Demand Curve Is The Market Demand Curve.

4 The Profit Maximization Condition Monopolist Demand curve: P(Q) =12-Q TR(Q) =P(Q) x Q =(12-Q)Q =12Q –Q 2 If TC(Q)=(1/2)Q 2 The profit max will be at Q=4 (Why?)

5 The Profit Maximization Condition Monopolist (continued) If the firm produces a quantity at which MR > MC, the firm can not be maximizing profit. If the firm produces a quantity at which MR < MC, the firm can not be maximizing profit.

6 The Profit Maximization Condition Monopolist (continued) Profit maximizing output when: MR = MC Figure Page 407. Profit Maximization By A Monopolist.

7 Average Revenue (AR) And Marginal Revenue (MR) AR = TR / Q AR: average revenue TR: total revenue Q: output sold Average revenue: total revenue per unit of output.

8 Average Revenue (AR) And Marginal Revenue (MR) (continued) MR = TR / Q MR: marginal revenue TR: total revenue Q: output sold : change

9 Average Revenue (AR) And Marginal Revenue (MR) (continued) Figure Page 410. Total, Average, And Marginal Revenue. * MR < P * MR < AR * MR curve must lie below demand curve.

10 The Profit Maximization Condition Shown Graphically Figure Page 412. The Monopolists Profit Maximization Condition.

11 A Monopolist Does Not Have A Supply Curve (continued) Figure Page 413. The Monopolists Does Not Have A Supply Curve.

12 The Importance Of Price Elasticity Of Demand Figure Page 416. Marginal Revenue And Price Elasticity Of Demand For A Linear Demand Curve.

13 Comparative Statics For Monopolists Shifts in market demand: Figure Page 423. Shifts in marginal cost: Figure Page 425.

14 The Welfare Economics Of Monopoly Figure Page 432. Monopoly Equilibrium VS Perfectly Competitive Equilibrium.


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