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Chapter 4

Monopoly Power and innovation

  • Monopoly Power and pure Monopoly

A firm has monopoly power [Market Power] if it has some choice in setting the price of it's product or it's decision about how much to supply influence the price it can change.

Firms are particularly likely to exercise such monopoly power if they are large relative to the size of the market as a whole. That is firms is relatively concentrated industries can be expected to have more monopoly power than firms in industries that contain many small firms.

Note that the degree of concentration can be measured by

  1. N of firms in an industry (NF).
  2. Market share of the largest firms as a prestige of total (MS).

As NF is small-=-=->great degree of concentration and vice versa.

As MS is large -=-=->great degree of concentration and vise versa.

The greatest power occurs when a single firm supplies the whole market, this is called a pure Monopoly.

  • The demand curve of a firm with Monopoly Power.

The demand curve for the output of pure monopolists the market demand curve since the firm has the market to itself.

  • Average Revenue and Marginal Revenue

The firm Total Revenue (TR) is P multiplied by the quantity demanded

The Average Revenue (AR) is the Revenue per unit sold

The Marginal Revenue (MR) is the change in total revenue resulting from the sale of an additional unit of output.

Consider

P = AR Q / TR / MR
100 1 / 100 / --
80 2 / 160 / 60
60 3 / 180 / 20
50 4 / 200 / 20

From the previous table:

If you compare Marginal with average revenue, you will see that MR is less than AR at each quantity demanded.

  • The price elasticity of demand:

Is equal to =Proportionate change in GD = Q2 – Q1 P2 – P1

Proportionate change in P Q1 P1

It is always negative due to the inverse relationship between price and quantity, and we only consider the absolute value.

Consider

  • Price elasticity and Marginal Revenue

-=-=->Small P-=-=->Large sales-=-=->TR -=-=-> MR is positive.

-=-=->Large P-=-=-> very small sales-=-=->TR would fall-=-=-> MR is negative.

Note:

- If P -=-=-> the TR is affected by TWOthings:

1. The price decline.

2. The Rising of QD.

And since TR = PQ

Then if the effect of price decline the effect of Q increase-=-=-> MR is (-)

If the effect of price decline the effect of Q increase-=-=->MR is (+)

  • Pure Monopoly

-Marginal and average costs.

As we know

TC = AC.Q then AC = TC

Q

MR = dTC

dQ=1

At level below Q1, AC falls as Q increase

Then MR AC

At level aboveQ1, AC rise as Q increase

Then MR AC

At Q1 AC=MC then AC at the minimum

Consider

Q / AC / TC / MC
1 / 100 / 100 / --
2 / 90 / 180 / 80
3 / 80 / 240 / 60
4 / 75 / 300 / 60

-Profit Maximizing monopolist

At firm that is seeking to maximize profit( )will choose the level of output that maximizes the difference between TC and TR

1.If MR MC, then by producing more the addition to TR the addition to TC, then we keeps producing more.

2. If MC MR, then by producing more we will lower the

-IfMX = MR then is maximized, and their is the Condition for profit maximization.

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Good Luck.:LuLu:.