November 17, 2014 1.Begin Lesson 3-8: Market Structure #2: Monopoly 2.HW: Activities 3-10 & 3-11.

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Presentation transcript:

November 17, Begin Lesson 3-8: Market Structure #2: Monopoly 2.HW: Activities 3-10 & 3-11

Monopoly 1. Single firm selling unique product – a sole producer 2. No close substitutes – unique product 3. Price maker – control over price 4. Blocked entry – strong barriers to entry block potential competition 10-2

Monopoly Demand Firm’s demand curve is the market demand curve. The pure monopolist can only increase sales by charging a lower price. THE LOWER PRICE OF THE EXTRA UNIT OF OUTPUT ALSO APPLIES TO ALL PRIOR UNITS OF OUTPUT. As a result, the Price at which an extra unit is produced and sold is always greater than the Marginal Revenue for that unit of production (P > MR) LO1 10-3

Demand in Pure Monopoly Pure CompetitionMonopoly Price Quantity P firm’s demand Market Demand

Monopoly Marginal Revenue An increase in production from 2 to 3 units causes price to fall from $46 to $44. Total revenue rises from $92 to $132. QuantityPrice (Avg. Rev.) Total Revenue 0$50$ For the third unit, marginal revenue = $___, < Price = $44.

Output and Price Determination A monopolist will use the MR = MC Rule in order to maximize profit: this determines the profit maximizing output, Q m. Price is determined by the market demand curve. A vertical line is drawn from Q m to the demand curve. P m is the profit-maximizing price.

Finding P m and Q m Price Quantity of output Demand MR MC PmPm QmQm MC = MR Firm Maximizes Total Revenue