Assumptions One seller and many buyers No close substitutes High barriers to entry
Can a monopolist add to barriers to entry? Patents Economies of scale Brand loyalty Access to raw materials High sunk costs Government regulations Threat of retaliation
Firms demand curve: Perfect competition A pc firm is too small to have any affect on the market price (P m ), and a pc firm can sell all it wants at P m, and if a pc firm raises its price by even 1¢ it will lose ALL of its customers, so a pc firms demand curve is horizontal at the market price.
Firms demand curve: Monopoly The monopolist IS the market. If the monopolist wants to sell more it must lower its price. Of course, if it is willing to sell less, it can raise the price.
Marginal revenue Definition of MR = the change in total revenue (TR = P x Q) from selling one more unit. For a pc firm, MR equals the market price. For a monopolist, it is more complicated because the firm must lower its price to sell an extra unit.
Monpolists MR If the monopolist could continue charging the same price, its MR would equal P. Because the firm must lower its price to sell the extra unit, it will add less revenue, so MR < P. How much revenue does it lose by cutting its price? That depends on how many it would sell at the original price.
Monopolists MR If a firm is selling 10 units and it must lower price by $5 to sell one more (the 11th), it loses $50 of revenue. If a firm is selling 100 units and lowers its price by $5, it loses $500 of revenue. The more a firm sells, the more it loses by reducing its price to sell one more.
PC firms MR PriceQuantityTRMR $100$0 $101 2$20$10 3$30$10 4$40$10
Total profit at Q* Add AVC and ATC curves to the previous graph. Show the total profit at Q*. Is this accounting or economic profit? Why?
Q* and elasticity Can profits possibly be maximized in the inelastic part of the demand curve? If demand is inelastic, what can you do to increase total profits? When will you stop? Can Q* be in the lower half of the demand curve on the next slide?