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Monopoly Power

price-maker - monopoly offers only 1 source for a given good  

  • firms in competitive market take the price of the market
    • can't charge higher than market price or else will lose all profit
  • monopoly forms the entire supply curve in forming a market equilibrium
  • will still maximize profits where MR = MC
  • monopoly promotes barriers to entry
    • no longer a monopoly if free entry was possible
  • average revenue = P(q)
    • P(q) given by market demand
    • no other competition to decide price
  • marginal revenue = d[P(q)q]/dq

equilibrium price  

  • find quantity that needs to be produced from MR=MC
  • plug that quantity into the market demand function to find market price
  • multiplant production - monopoly has different plants w/ different production
    • use total marginal product to find total quantity that needs to be produced
    • use the price (not market price) that corresponds to total quantity and the marginal cost functions for each individual plant to find how much each will produce

 

  • demand
  • marginal revenue
  • marginal cost
  • p* = market price
  • q = quantity at the intersection of marginal revenue and cost
  • MR = P + P(1/Edemand)
  • more elastic >> price mark-up decreases (p*-p decreases)

monopolistic competition - products still distinct but possibly substitutes  

  • ie. soda brands
  • product differentiation - firms try to differentiate their product from that of other firms
    • otherwise, each firm bound by prices set by other firms
  • each firm now faces a different demand curve
Subject: 
Economics
Subject X2: 
Economics

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