1. Chapter 5.4 &6 Monopoly Chapter 5.4 &6 Monopoly

2. REVENUE Revenue curves when price varies with output (downward-sloping demand curve)

3. Revenues for a firm facing a downward sloping demand curve

4. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR)

5. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR)

6. AR and MR curves for a firm facing a downward-sloping D curve Q (units) 12345671234567 P =AR (£) 87654328765432 D= AR AR, MR (£) Quantity 5

7. TR at P=6, Q = 3 is 18TR at P=6, Q = 3 is 18 TR at P=5, Q = 4 is 20TR at P=5, Q = 4 is 20 So MR = 2So MR = 2 Alternative Story:Alternative Story: Gain from selling one more unit = 5Gain from selling one more unit = 5 But now have reduced price from 6 to 5 on the first three units sold.But now have reduced price from 6 to 5 on the first three units sold. So losing 3*£1=£3 as a resultSo losing 3*£1=£3 as a result MR = price of extra unit (5) less price reduction on all units sold previously (3) = 5 – 3 = 2MR = price of extra unit (5) less price reduction on all units sold previously (3) = 5 – 3 = 2

8. Revenues for a firm facing a downward sloping demand curve 2

9. Q (units) 12345671234567 P =AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 MR (£) 6 4 2 0 -2 -4 AR MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

10. Why is the MR curve below the Demand Curve Do differentiate P.Q we use the product rule. Let u=P and v=Q

11. Why is the MR curve below the Demand Curve?

12. MR = price of extra unit (5) less price reduction on all units sold previously (3)MR = price of extra unit (5) less price reduction on all units sold previously (3) = 5 – 3 = 2= 5 – 3 = 2

13. Q (units) 12345671234567 P =AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 MR (£) 6 4 2 0 -2 -4 AR MR AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

14. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR)

15. TR curve for a firm facing a downward-sloping D curve Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14

16. TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14

17. TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) MR

18. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) – –revenue curves and price elasticity of demand Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) – –revenue curves and price elasticity of demand

19. AR MR Elasticity = -1 Elastic Inelastic AR, MR (£) Quantity AR and MR curves for a firm facing a downward-sloping D curve

20. MONOPOLY Essential Characteristics of the monopolist's demand curve – –downward sloping – –MR below AR

21. £ Q O MR AR Profit maximising under monopoly

22. MONOPOLY The monopolist's demand curve – –downward sloping – –MR below AR Equilibrium price and output

23. £ Q O AC MC MR AR Profit maximising under monopoly

24. £ Q O MC QmQm MR MR=MC rule still applies Determines Q m

25. £ Q O MC AR QmQm MR AR a Profit maximising under monopoly Given MR=MC, we then find Price at Q m

26. £ Q O AC MC AR AC QmQm MR AR a b Profit maximising under monopoly..and profits?

27. £ Q O AC MC AR QmQm MR AR What is the supply curve for the monopolist? There isn’t any Why not?

28. £ Q O QmQm What is the supply curve for the monopolist? The Supply Curve is a unique relationship between Price and Quantity

29. £ Q O AC MC P0P0 QmQm MR 0 AR 1 a b What is the supply curve for the monopolist? But here not unique P1P1 MR 1 AR 0

30. £ Q O P0P0 QmQm a b What is the supply curve for the monopolist? P1P1 The Supply Curve is a unique relationship between Price and Quantity Here we found that monopolist will supply the same amount at two different prices So no Supply Curve

31. £ Q O QmQm What is the supply curve for the monopolist? The Supply Curve is a unique relationship between Price and Quantity Here we found that monopolist will supply the same amount at two different prices

32. MONOPOLY Defining monopoly Barriers to entry Natural monopoly Defining monopoly Barriers to entry Natural monopoly

33. MONOPOLY Defining monopoly Barriers to entry – –economies of scale – –product differentiation and brand loyalty – –lower costs for an established firm – –ownership or control over key factors – –ownership or control over outlets – –legal restrictions – –mergers and takeovers – –aggressive tactics – –intimidation Natural monopoly Defining monopoly Barriers to entry – –economies of scale – –product differentiation and brand loyalty – –lower costs for an established firm – –ownership or control over key factors – –ownership or control over outlets – –legal restrictions – –mergers and takeovers – –aggressive tactics – –intimidation Natural monopoly

34. Natural Monopoly £ O Q LRAC Long –Run average cost curve is downward sloping When will this occur? If there are large Fixed Costs and small MC MC

35. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run Disadvantages of monopoly – –high prices / low output: short run

36. £ Q O MC Q1Q1 MR AR = D P1P1 Equilibrium of industry under perfect competition and monopoly: with the same MC curve

37. £ Q O MC Q1Q1 MR P1P1 P2P2 Q2Q2 Equilibrium of industry under perfect competition and monopoly: with the same MC curve AR = D

38. £ Q O MC ( = supply under perfect competition) Q1Q1 MR P1P1 P2P2 Q2Q2 Equilibrium of industry under perfect competition and monopoly: with the same MC curve AR = D

39. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run (Profits not eliminated) Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run (Profits not eliminated)

40. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate

41. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency

42. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly

43. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale

44. Natural Monopoly £ O Q LRAC MC

45. Industry Demand Curve £ O Q D If two firms in the industry (A Duopoly) the demand curve for each is D 1 P max At prices above P max competitor gets all the business D

46. Natural Monopoly £ O Q LRAC MC This industry is uncompetitive with two firms And no production occurs D

47. Natural Monopoly £ O Q LRAC MC With one firm, however, equilibrium occurs at Q m MR QmQm PmPm D DmDm

48. An alternative version of the story is to examine an industry where the cost curve an individual firm faces falls as the scale of production rises. SO now we are going to examine the Equilibrium of industry under perfect competition and monopoly: with different MC curves

49. £ Q O MC ( = supply) perfect competition MR P 2 =MR. =MC Q2Q2 AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves

50. £ Q O MC ( = supply) perfect competition MR Q2Q2 MC monopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves P 2 =MR. =MC

51. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 Q2Q2 MC monopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves P 2 =MR. =MC

52. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 Q2Q2 MC monopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves P 2 =MR. =MC AC

53. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 Q2Q2 MC monopoly x AR = D Note Monopoly is better as long as the new MC curve lies below point x P 2 =MR. =MC

54. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 P2P2 Q2Q2 MC monopoly P3P3 AR = D Suppose a regulator set the price at P 3 (Average Cost Pricing). How would this effect the behaviour of the monopolists? AC

55. £ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 P2P2 Q2Q2 MC monopoly Q3Q3 P3P3 AR = D Suppose a regulator set the price at P 3 (Average Cost Pricing). How would this effect the behaviour of the monopolists?

56. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale – –profits can be used for investment (Dodgy) Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale – –profits can be used for investment (Dodgy)

57. MONOPOLY Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale – –profits can be used for investment (dodgy!!) – –promise of high profits encourages risk taking (Still a bit dodgy – what is appropriate risk taking?) Disadvantages of monopoly – –high prices / low output: short run – –high prices / low output: long run – –lack of incentive to innovate – –X-inefficiency Advantages of monopoly – –economies of scale – –profits can be used for investment (dodgy!!) – –promise of high profits encourages risk taking (Still a bit dodgy – what is appropriate risk taking?)

58. MONOPOLY The monopolist's demand curve – –downward sloping – –MR below AR Equilibrium price and output Limit pricing The monopolist's demand curve – –downward sloping – –MR below AR Equilibrium price and output Limit pricing

59. AC monopolist £ O Q

60. Limit pricing AC new entrant AC monopolist £ O Q

61. Limit pricing AC new entrant AC monopolist £ O Q PLPL

62. TR curve for a firm facing a downward-sloping D curve TR Elasticity = -1 Elastic Inelastic Quantity TR (£)

63. REVENUE Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) – –revenue curves and price elasticity of demand Shifts in revenue curves Revenue curves when price varies with output (downward-sloping demand curve) – –average revenue (AR) – –marginal revenue (MR) – –total revenue (TR) – –revenue curves and price elasticity of demand Shifts in revenue curves

64. PROFIT MAXIMISATION Using total curves – –maximising the difference between TR and TC Using total curves – –maximising the difference between TR and TC

65. Finding maximum profit using total curves TR, TC, T  (£) TR TC Quantity

66. PROFIT MAXIMISATION Using total curves – –maximising the difference between TR and TC – –the total profit curve Using total curves – –maximising the difference between TR and TC – –the total profit curve

67. TR, TC, T  (£) TT TR TC Quantity Finding maximum profit using total curves

68. TR, TC, T  (£) TT TR TC a b c d Quantity Finding maximum profit using total curves

69. TR, TC, T  (£) TT TR TC d e f Quantity Finding maximum profit using total curves

70. PROFIT MAXIMISATION Using total curves – –maximising the difference between TR and TC – –the total profit curve Using marginal and average curves Using total curves – –maximising the difference between TR and TC – –the total profit curve Using marginal and average curves

71. PROFIT MAXIMISATION Using total curves – –maximising the difference between TR and TC – –the total profit curve Using marginal and average curves – –stage 1: profit maximised where MR = MC Using total curves – –maximising the difference between TR and TC – –the total profit curve Using marginal and average curves – –stage 1: profit maximised where MR = MC

72. MC MR Quantity Costs and revenue (£) Finding the profit-maximising output using marginal curves

73. MC MR Quantity Costs and revenue (£) Profit-maximising output e

74. PROFIT MAXIMISATION Using total curves – –maximising the difference between TR and TC – –the total profit curve Using marginal and average curves – –stage 1: profit maximised where MR = MC – –stage 2: using AR and AC curves to measure maximum profit Using total curves – –maximising the difference between TR and TC – –the total profit curve Using marginal and average curves – –stage 1: profit maximised where MR = MC – –stage 2: using AR and AC curves to measure maximum profit

75. MR Quantity Costs and revenue (£) Profit-maximising output e MC Finding the profit-maximising output using marginal curves

76. Measuring the maximum profit using average curves MR Quantity Costs and revenue (£) MC AC AR

77. MR Quantity Costs and revenue (£) MC AC AR 6.00 4.50 a b Measuring the maximum profit using average curves

78. MR Quantity Costs and revenue (£) MC AC AR 6.00 4.50 TOTAL PROFIT Measuring the maximum profit using average curves

79. PROFIT MAXIMISATION Some qualifications – –long-run profit maximisation – –the meaning of profit What if a loss is made? – –loss minimising: still produce where MR = MC Some qualifications – –long-run profit maximisation – –the meaning of profit What if a loss is made? – –loss minimising: still produce where MR = MC

80. Loss-minimising output O Costs and revenue (£) Quantity MC AC AR MC

81. O Costs and revenue (£) Quantity MC AC AR MC Q Loss-minimising output

82. O Costs and revenue (£) Quantity MC AC AR MC Q AC AR Loss-minimising output

83. O Costs and revenue (£) Quantity MC AC AR MC Q LOSS AC AR Loss-minimising output

84. PROFIT MAXIMISATION Some qualifications – –long-run profit maximisation – –the meaning of profit What if a loss is made? – –loss minimising: still produce where MR = MC – –short-run shut-down point: P = AVC Some qualifications – –long-run profit maximisation – –the meaning of profit What if a loss is made? – –loss minimising: still produce where MR = MC – –short-run shut-down point: P = AVC

85. The short-run shut-down point O Quantity AVC AC Costs and revenue (£)

86. O Quantity AVC AC AR Costs and revenue (£) The short-run shut-down point

87. O Costs and revenue (£) Quantity AR AVC AC P = AVC Q The short-run shut-down point

88. PROFIT MAXIMISATION Some qualifications – –long-run profit maximisation – –the meaning of profit What if a loss is made? – –loss minimising: still produce where MR = MC – –short-run shut-down point: P = AVC – –long-run shut-down point: P = LRAC Some qualifications – –long-run profit maximisation – –the meaning of profit What if a loss is made? – –loss minimising: still produce where MR = MC – –short-run shut-down point: P = AVC – –long-run shut-down point: P = LRAC