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## Chapter 10: Monopoly and Monopsony

by: Natalie Strawn

16

2

3

# Chapter 10: Monopoly and Monopsony ECO 420K

Natalie Strawn
UT
GPA 3.66

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These notes cover the depths between the differences of monopoly and monopsony while also providing definitions, formulas, and examples.
COURSE
MICROECONOMIC THEORY
PROF.
John Thompson
TYPE
Class Notes
PAGES
3
WORDS
CONCEPTS
monopoly, monopsony, markets, Economics, Microeconomics
KARMA
25 ?

## Popular in Economcs

This 3 page Class Notes was uploaded by Natalie Strawn on Saturday July 2, 2016. The Class Notes belongs to ECO 420K at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by John Thompson in Summer 2016. Since its upload, it has received 16 views. For similar materials see MICROECONOMIC THEORY in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.

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Date Created: 07/02/16
June 23, 2016 Ch 10 – Monopoly and Monopsony Monopoly – Single seller, no close substitutes, barriers to entry Monopsony – Single buyer, (opposite of monopoly) A monopoly will produce the output where MR = MC, just like competitive firms. -(linear) demand P = a -bQ -total revenue TR = PQ = aQ – bQ^2 -marginal revenue MR = dTR/dQ = a – 2bQ For linear demand, the corresponding MR curve has (1) same intercept and (2) twice the slope. (Figure 10.1) Monopoly chooses output where MR = MC and sets price. (Figure 10.2) Find profit maximizing Q,P, ∏, MC and Ep. Demand P = 40 – Q Cost TC = 50 + Q^2 (a)MR =MC method (b) profit function method Fill in work*** What if the monopoly has multiple plants? For profit maximization, MR = MC1 and MR = MC2 -Why MC1 = MC2? *Produce more in the cheaper plant until marginal cost becomes the same in both plants. Same output at a lower cost. The optimal markup is a function of elasticity: L = (P – MC)/P = 1/ |Ep| The Lerner Index – a measurement of monopoly power. (Figure 10.8) -Perfect competition (firms) = 0 -Least competition (monopoly) = 1 *A profit maximizing firm will never price in the inelastic part of their demand curve. -Inelastic: raise revenue, lower cost, raise price until not inelastic *A monopoly has no supply curve. “Market power” and “monopoly power” are synonymous. They mean price setting ability. Monopoly power comes from: a) the elasticity of market demand b) the number of firms c) the interaction of firms The social cost of monopoly is the DWL, and possibly also rent seeking behavior and X-inefficiency. (Figure 10.10) Rent seeking – using resources in socially unproductive efforts to acquire monopoly power. (Think lobbying). X-inefficiency - when technical efficiency is not being achieved due to a lack of competitive pressure. Natural monopoly – a market in which a monopoly would naturally arise if left unregulated. (Figure 10.12) -Typically, the result of large fixed costs, low marginal cost, and significant economies of scale. -In many cases, natural monopolies are allowed, but regulated. -Rate-of-return regulation is commonly used where price regulation isn’t feasible. Monopsony A monopsony is a firm with significant buying power. “Monopsony power” enables a firm to drive price below the competitive price. Examples: (a) public school systems (b) defense spending by gov’t (c) the ‘company town’ (d) Massive retailers (Walmart) A firm with monopsony power would buy as long as the marginal benefit exceeds marginal cost -Marginal value (MV) - additional benefit from buying one more unit. Given by demand curve. -Average expenditure (AE) – average cost of buying Q units. Given by the supply curve. -Marginal expenditure (ME) – additional cost from buying one more unit. Finding ME… -linear supply: P = a +bQ -total expenditure: TE = PQ = aQ + bQ^2 -marginal expenditure: ME = dTE/dQ = a + 2bQ For linear supply, the corresponding ME curve has: 1) Same intercept 2) Twice the slope (Figure 10.14) A monopsonist chooses output where MV = ME and sets price. Find profit maximizing n and W. Demand W = 30,000 -125n Supply W = 1,000 + 75n A monopsony is similar to monopoly. Monopsony power comes from: a) The elasticity of market supply b) The number of buyers c) The interaction among buyers (Figure 10.16) The social cost of monopsony is DWL. (Figure 10.17)

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