Chapter 8 Market Power: Monopoly and Monopsony. What is Monopsony? Mono = means “One” + Psony = means “Buyer” = One Buyer or One Consumer.

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Presentation transcript:

Chapter 8 Market Power: Monopoly and Monopsony

What is Monopsony? Mono = means “One” + Psony = means “Buyer” = One Buyer or One Consumer

Monopsony

Monopsony Power

Monopsony (example 1)

Monopsony (example 1… cont)

Monopsony (example 2)

Monopsony (example 2 …cont)

Monopoly While a Competitive firm is a price taker, a monopoly firm is a price maker. One seller and many buyers:  Implication: the seller is a price maker and the buyers are price takers. A firm is considered a monopoly if: 1.It is the sole seller of its product. 2.Its product does not have close substitutes.

Quiz #1 Assuming the competitive market price of a good is $22 and the firm’s total cost is: TC= Q + 0.1Q2 1.What is the ideal quantity to be produced to maximize profit? 2.What is the firms Profit at the ideal quantity?

Solution to Quiz #1 In Perfectly competitive market: P = MC MC= d(TC)/d(Q)= Q MC= Q P= Q 22 = Q  Ideal Quatity = 20/0.2 = 100 TR= 100*22 = $2200 TC= (100) + 0.1(100*100) = $1300  Profit = TR – TC = 2200 – 1300= $900

Quiz #2 In a perfect competitive market we have the following curves for demand and supply. Qd= 100 – 5P Qs= 25P – 200 The firm’s marginal cost is MC = Q - 20 How much output does this firm has to produce in order to maximize its profit?

Solution to Quiz #2 First we find the equilibrium price: 100 – 5P = 25P – P = 300 P = $10 In a competitive market P=MC 10 = Q - 20 Q = 30