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“So we ve been introduced to the monopolist. We have an understanding of why such such a market structure would exist. What are the key characteristics. The things that would entry and so now we want to start getting into how we would graph a monopolist and how it makes its decisions to maximize profits how do we show how much profit.
They re making all those wonderful things so we re going to start here with the comparison of perfect competition and monopoly and we re looking at it from the firm s point of view. And so what we learned in a earlier chapter about the perfect competitor was that it s firm demand came from the market. The market demand. Which is downward sloping and the market supply curve would interact and determine the market price and then that would give us our firm demand.
Which is the same thing as our marginal revenue situation looks a little different for a monopolist. We can look at it what happens if a perfectly competitive firm raises its price versus. What happens. If a monopolist raises its price so looking back at the perk competitor.
If you were to raise your price and to charge anything other than let s say. This was ten dollars and this particular firm decides it wants to charge twelve dollars. Because it feels so special about itself. What would happen well from the markets point of view from the consumers in the market.
They can buy as much as they want at ten dollars. That was that was the market demand and supply. Why would you want to go and pay. Twelve dollars for something that you perceive is being identical.
Remember that was the key characteristic perfect competitors is their product seems identical. So. The point is that a perfect competitive firm would sell zero if they raised the price like that so they re not going to of course is what we conclude. But what is the what is the situation like for a monopolist if they were selling some quantity will call it fifty at this ten dollar prize.
Do they do they lose the whole market when they raise the 212 and the answer is no they don t okay. What we have to think about is what does it meet what is the difference from the firm point of view of perfect pet ative and a monopolist when we talked about for a perfect competition. We talked about this horizontal demand curve that s all a perception for the point of view of the firm. The true market demand of course is downward sloping.
It s just that they were so small they couldn t they couldn t they couldn t shift the whole demand curve the whole supply curve. I guess is really what they d be shifting they couldn t shift the whole supply curve by producing more because they re just a deep tiny little percentage and therefore. The price didn t appear to change no matter. What they did but a monopolist is the market they re the the demand curve for the market is the demand curve for the firm so on the left hand side for perfect competition.
I have to draw two pictures. I have to draw the market demand supply which determines this price for the firm. But on the monopolist. It s all one picture.
So if a monopolist raises its price..
They don t lose all of their sales. They re just going to lose some of them so let s bring this down and call that 40 okay so if they were to raise their price from 10 to 12. They do lose some because their law of demand of course holds people will have to make their decisions. They re going to shift their money around they re not going to necessarily completely drop out of the market.
But they might buy a fewer because law of demand price goes up quantity demanded goes down. Some will economize. Some will try to use fewer units of products. Some may actually do without but in the market sense you don t lose everything you just lose.
Some now. This is going to be very important for the next little bit. We want to look at if we look back over the firm. We have demand equals price equals marginal revenue.
What s going to happen over here hmmmm. What s going to happen over here is going to be just an even more complicated. We see that the price when the price was ten dollars. They sold at sea.
They sold 50 so total revenue is 500 when the price is 12. They sold 40 so total revenue sorry put that there total revenues 480. What is marginal revenue over here. We didn t have to think about it too hard because every time we sold a unit.
We got exactly the price and that additional amount so i got additional ten dollars additional ten dollars ditional ten dollars. And that s all it was trying to calculate is what is additional revenue here. If we re going to move from charging twelve dollars to charge in ten dollars. If we re trying to increase the quantity sold the only way we can do that is by dropping the price people are only willing to buy 40 units at 12.
If i want to sell more than 40. I have to because of my downward sloping demand drop my price. And so i do take my total revenue from 480 to 500 total revenue 482 500. I do increase my revenue.
My walk my additional revenue by 20. My marginal revenue would be 20 right but 20 for those 10 units. So that s an additional 10 units to get twenty dollars an additional two dollars per unit. I m able to get but but but what that all means is my marginal revenue does not equal price and in fact.
What s going to happen is it s always going to be less than the price. So let s look at that next alright. So we re going to pretend here that we have a monopolist a very tiny world and i m going to go with something like movies. There s only one company that that sells movies and and at the moment.
What we can see is that if they will price it at twenty dollars..
They will sell 92 getzen if they priced it at nineteen dollars. They will sell ten. So the demand curve is not under the control of the monopolist that is one of the misconceptions about monopolist. They can charge any price they want.
And what we re going to learn in this chapter. That s not true they have to be sensitive to the demand curve. They can t force you to buy something you don t want it can t make you pay a price you don t want the demand curve is telling you what prices people are willing to pay for particular quantities. And we also find that charging the maximum prices.
We want to show this right now. But we will show that charging the highest price possible is not how they maximize profits the monopolist does have to respond to the demand curve. They re balancing their costs and the revenue and the revenue is dependent on the demand. So just putting that out there but right now let s just look at the impact on marginal revenue that s what we want to focus on so if they want to sell one more ticket.
They want to move from nine to ten according to this demand curve they have to drop the price from twenty dollars to 19. Okay now in our world. We are dealing with the situation where there is a market price they re not going to charge different prices to different consumers. That s called price discrimination.
Which sounds like a bad thing. But i promise you it s not it s just discriminating between your different groups of consumers. Some price discrimination is legal. Some is illegal unfortunately we re not really going into that in this class.
But we re going to assume that this is a world where they can only charge one price. There s no way for them to determine which consumers are willing to pay more or less. So if they want to sell one more ticket. They have to drop the price for everybody now if they do so what is the significance of this little rectangle.
I ve drawn here what it shows you is that for each of the nine tickets they used to be able to sell at twenty dollars. They re now going to sell them for nine for nineteen dollars. So they have lost a dollar on every one of those nine ticket sales. Why do why would they be willing to do that well because they re trying to gain this one trying to gain this sale and in order to do so they gave up the one dollar per ticket price on each one of those nine.
So they re going to gain all of this what is that that means that they re able to sell one more ticket at 90. So they re going to gain 19 and give up nine dollars okay. So what s the significance of that so let me write that down first they are they lose lose nine dollars one ticket one dollar per ticket sale of the original nine and they gain 19 by having that additional sale that tent sale so the net here will be ten dollars so net in this case gain of ten dollars. What is marginal revenue marginal revenue is the additional revenue you earn by selling one more unit in this particular.
Example that i have drawn your marginal revenue is the ten dollars in order to sell one more ticket. I had to drop the price and i could gain ten dollars. So what this really means is marginal revenue is ten dollars. But price is 19 alright.
Me ask you one little technical question does..
10 equal. 19. That was a hard one letting it of course tin does not equal. 19.
And so what would i m prime trying to point out here is price does not equal marginal revenue in a monopolist situation price does not equal marginal revenue in a downward sloping demand case and that is the significance of all of this i m trying to show you that when a firm faces a downward sloping demand. The only way for them to sell more is to drop the price which means they lose revenue on some of those earlier units. They would have sold at a higher price and they gain revenue for selling that additional one and whatever that nets out is your marginal revenue. So marginal revenue will lie below the demand curve.
It s no longer equal to it like in perfect competition. Okay. So now we re ready to show profit maximization for a monopolist. It s going to seem quite similar to we ve learned before especially if you break it down by steps profit maximization is where marginal revenue equals marginal cost.
If you produce a quantity less than that we can see that marginal revenue. So here s where they re equal so for all these quantities where marginal where it s less than the spot where america s mc marginal revenue is higher the marginal cost. So you re growing total revenue faster then you re growing costs. Which basically means you re growing profits as i expand my output.
My profits grow grow grow grow and as soon as i go to a quantity beyond that my costs additional costs are faster than my additional revenue are beginning to shrink profits. So profit will be maximized at that spot n. Var e. Equals mc.
Alright step. 2. Will be find the price for the q star. So find p star for the q star.
You just found so here s q star. Where do we find price aha. We have to look to a demand curve. A demand curve just happens to be the curve that tells you what price people are willing to pay for every quantity in perfect competition.
We didn t really have to think about that too much because marginal revenue was equal to price. But here this is where you re going to get lost once you find where mr. Equals mc. You ve got to also find the press all right step.
3. Like we ve seen before in perfect competition is am. I making a profit or a loss. So the first thing is am.
I making profit or loss..
I have to look to my average total cost so find the average total cost at your profit. Maximizing quantity of q star. All right we kind of went across it there we have q star coming up to average total cost. Which is this lovely yellow line here and so what we can see then quite clearly in this pictures at the price.
The p star. In the q. Star. The p star is quite a significant a higher amount than average total cost so we are making a profit and then we can let s see here i have a new color.
We can then shade in our profit. So it s going to be the area from the p down to the average total cost for all the units q. Star that i m selling whoops that supposed to be a p star. And so it s this whole shaded rectangle.
So we should see then a repeating of what we ve done before in perfect competition. What s a little different is our demand curve is now downward sloping our demand curve does not equal or marginal revenue. But at the heart what we re doing here can be broken down into these little steps. And i recommend you do break it down into these little steps.
Where you find margin of equal marginal cost q. Star use that q star to find the price. You should charge you gotta look at the demand curve wherever it is downward sloping horizontal. Don t care find that peace star and then you take that p star.
At the q star. And you compare that to the average total cost. And so the final step would be if come on pin. If there we go price greater than average total cost.
I should say the p star is going to that implies profit. And that is what we would normally expect with the monopolist. They re not going to stay in business for long if they re not making a profit. Unless we get into something more complicated like the government giving them a subsidy and so the other thing.
That s significant about the profit for a monopolist is since entry is blocked. Nobody s going to come in and affect the market supply curve. Nobody s going to drive the price down. They could probably sit there for a very long time and make ” .
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