TAILIEUCHUNG - Lecture Economics (9/e): Chapter 14 - David C. Colander

Chapter 14 - Monopoly and monopolistic competition. After reading this chapter, you should be able to: Summarize how and why the decisions facing a monopolist differ from the collective decisions of competing firms; determine a monopolist's price, output, and profit graphically and numerically; show graphically the welfare loss from monopoly; explain why there would be no monopoly without barriers to entry. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Summarize how and why the decisions facing a monopolist differ from the collective decisions of competing firms Show graphically the welfare loss from monopoly Determine a monopolist’s price, output, and profit graphically and numerically Explain why there would be no monopoly without barriers to entry Explain how monopolistic competition differs from monopoly and perfect competition 2 A Monopolistic Market Barriers to entry into the market prevent competition Monopoly is a market structure in which one firm makes up the entire market There are no close substitutes for the monopolist’s product Barriers to entry can be: Legal Sociological Natural Technological 3 The Key Difference Between a Monopolist and a Perfect Competitor A monopolistic firm’s marginal revenue is not its price Marginal revenue is always below its price Marginal revenue changes as output changes and is not equal to the price A monopolistic firm’s output decision can affect price There is no competition in monopolistic markets so monopolists see to it that monopolists, not consumers, benefit 4 Determining the Monopolist’s Price and Output Numerically Marginal revenue (MR) is the change in total revenue associated with a change in quantity The monopoly maximizes profit when marginal revenue equals marginal cost The goal of the monopolistic firm is to maximize profits, the difference between total revenue and total cost Marginal cost (MC) is the change in total cost associated with a change in quantity 5 Determining the Monopolist’s Price and Output Numerically If MR MC, The monopoly can increase profit by increasing output The profit-maximizing condition of a monopolistic firm is: MR = MC For a monopolistic firm, MR < P A monopolistic firm maximizes total profit, not profit per unit 6 Monopolistic Profit Maximization .

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