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The price of the good equals both the firms average revenue and its
marginal revenue.
To maximize profit, a firm chooses the quantity of output such that marginal
revenue equals marginal cost.
In the short run, when a firm cannot recover its fixed costs, the firm will
choose to shut down temporarily if the price of the good is less than average
variable cost.
In the long run, when the firm can recover both fixed and variable costs, it
will choose to exit if the price is less than average total cost.
In a market with free entry and exit, profits are driven to zero in the long run
and all firms produce at the efficient scale.
In the long run, the number of firms adjusts to drive the market back to the
zero-profit equilibrium.
Lecture 10
At the end of the process of entry and exit, firms that remain must be
making zero economic profit.
The process of entry and exit ends only when price and average total cost
are driven to equality.
Marginal Firm
The marginal firm is the firm that would exit the market if the price
were any lower.
Monopoly
Instructor: Prof.Dr.Qaisar Abbas
Course code: ECO 400
Lecture Outline
1. What is a monopoly?
2. Why monopolies arise?
3. How monopolies make production and pricing decisions?
4. The welfare cost of monopolies
5. Public policy towards monopolies
6. Price discrimination
What is a monopoly?
A situation in which a single company owns all or nearly all of the
market for a given type of product or service.
1. Monopoly Resources
Governments may restrict entry by giving a single firm the exclusive right to
sell a particular good in certain markets.
Patent and copyright laws are two important examples of how government
creates a monopoly to serve the public interest.
3. Natural Monopolies
A natural monopoly arises when there are economies of scale over the
relevant range of output
Is a price maker
Competitive Firm
Is one of many producers
Is a price taker
P Q = TR
TR/Q = AR = P
DTR/DQ = MR
A Monopolys Profit
Profit equals total revenue minus total costs.
Profit = TR TC
Profit = (TR/Q - TC/Q) Q
Profit = (P - ATC) Q
Doing Nothing
Government can do nothing at all if the market failure is deemed small
compared to the imperfections of public policies.
Price Discrimination
Price discrimination is the business practice of selling the same good at
different prices to different customers, even though the costs for producing for
the two customers are the same.
Price discrimination is not possible when a good is sold in a competitive
market since there are many firms all selling at the market price. In order to
price discriminate, the firm must have some market power.
Perfect Price Discrimination
Perfect price discrimination refers to the situation when the monopolist
knows exactly the willingness to pay of each customer and can charge
each customer a different price.
Two important effects of price discrimination:
It can increase the monopolists profits.
It can reduce deadweight loss.
Examples of Price Discrimination: Movie tickets, Airline prices, Discount
coupons, Financial aid, Quantity discounts
Summary
A monopoly is a firm that is the sole seller in its market.
It faces a downward-sloping demand curve for its product.
A monopolys marginal revenue is always below the price of its good.
Like a competitive firm, a monopoly maximizes profit by producing the quantity
at which marginal cost and marginal revenue are equal.
Unlike a competitive firm, its price exceeds its marginal revenue, so its price
exceeds marginal cost.
A monopolists profit-maximizing level of output is below the level that
maximizes the sum of consumer and producer surplus.
Summary