Princ Of Microecon
Princ Of Microecon ECN 001A
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This 7 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 001A at University of California - Davis taught by Staff in Fall. Since its upload, it has received 46 views. For similar materials see /class/191881/ecn-001a-university-of-california-davis in Economcs at University of California - Davis.
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Date Created: 09/08/15
University of CaliforniaDavis TA Jason Lee Economics lAIntro to Micro Email jawleeucdavisedu Handout 8 I Monopohes Firms are said to be monopolies if they have the following characteristics 1 The firm is the only seller in the industry 2 The product is unique 3 Entry into the industry is blocked Why would the entry into the industry be blocked 1 Government blocks entry via patent rights or franchises 2 One firm controls the key raw material not common 3 Network externalities you need a lot of users before it becomes valuable thus it is hard to start 4 Natural monopolies economies of scale are so large that there is room only for 1 firm Decision Process for a Monopolist One key difference between a monopolist and a perfectly competitive firm is that there is no difference between the monopolist and the industry The monopolist is the industry Thus the industry demand curve also happens to be the demand curve for the monopolist One key similarity between a monopolist and a perfectly competitive firm is that the monopolist will maximize profits where MR MC However MR P as it did under perfect competition In fact the MR curve will always be below the demand curve Example Suppose that Kiev Plutonium Factory is a monopolist in the production of Polonium 210 a radioactive substance used to assassinate spies It faces the following demand schedu e Price Quantity 60 0 57 1 54 2 51 3 48 4 45 5 42 6 Now using definitions learned in previous chapters calculate the total revenue and marginal revenue at each quantity Price Quantity Total Revenue Mar inn Revenue 60 0 57 1 57 57 54 2 108 51 51 3 153 45 48 4 192 39 45 5 225 33 42 6 252 27 Plot the demand curve and the MR curve to see that the MR curve is always below the demand curve for a monopolist Demand and MR 60 50 40 30 20 10 0 Demand Price I MR 0 5 10 Output The reason why the MR curve is below the demand curve is that in order to increase sales the monopolist must lower price on all units since it faces a downward sloping demand curve There are two effects when a monopolist cuts prices 1 The firm gains revenue because it can sell more units 2 The firm loses revenue because the firm must lower the price for units it could have sold at a higher price Figure l C Mk The firm will produce at the profit maximizing point where MCMR In this case the monopolist will produce at Q1 At Q1 the price that is charged is found by looking at the demand curve Thus the monopolist will charge P1 and supply Q1 units of the good Now that we know where the monopolist is going to produce let s introduce our cost curves just the ATC to see how much profit a monopolist will make Figure 2 AW This graph is the same as the one above with the only addition being the ATC curve We know that the r 39 39 r quot quotquot 39 39 P andQ Whereisthe pro t We know that total revenue is P x Q What is total cost Total cost will be Q x ATC by de nition r quotquot quot quot quot t t st39 39 39 39 the graph above Note that unlike perfectly competitive rm a monopolist will keep this pro t even in the long run Practice Problems 1 Examir e these revenue and cost figures for a monopoly firm Price X Quantity Total Wgznal Total Cost Marginal Pro t Demanded Revenue X Revenue X 3 Cost X 20 0 4 1 6 1 10 1 2 2 l4 1 0 3 20 7 4 28 4 5 40 0 6 54 a Fill in the empty columns b At what price level and output level would the firm be maximizing its profit and what would those profits be 2 Answer the question based on the accompanying graph for a monopolist ch mace a lfthis firm is a profitmaximizer how much output will it produce b At what price will the firm sell its output c How much pro t or loss will this firm realize H Monopolistic Competition Firms are said to be monopolistically competitive if they have the following characteristics 1 There are many firms in the industry 2 The product is differentiated 3 Barriers to entry are low a 4quot quot quot As aresul quot L 39 39 afirmthat is monopolistically competitive faces a downward sloping demand curve for its product The only Tquot r L quot39 quot quotquot h 39 thegooditsells as a result it will have a MR curve below its demand curve for the same reason a monopoly has a MR elow its deman curve Not surprising the profitmaximizing point is where MRMC the graph IS EXACTLY THE SAME AS THE MONOPOLY CASE Refer to Figure2 1 and 2 to see how to find t f39 39 39 39 39 39 quot 39 L competitive firm The key 39 39 39 39 39 mnnnnnlv is that in the long run any profits will disappear because offree entry by firms The long run is where the similarity between perfect competition quot 39 r 39 39 h h 39 39rms wil 39 e industry 39 L 39 quot 39 until profim disappear How do we see this graphically There growing availability of substitutes is going to have 2 big effects 1 The firm s demand curve will shift to the left inward At any given price consumer s will demand less of the firm s product 2 The rm s demand curve becomes more elastic atter Recall that an elastic demand curve implies that a quantity demanded is very sensitive to a price change Ifa good has more substitutes then people will not purchase that good ifthere is an increase in price Figure 3 Short Run Situation 4 1 l39 In the long run the demand curve becomes atter and shim to the left until it is tangent to the ATC curve At that point pro m are exhausted Unlike perfectly competitive rms 0 economic pro ts is not inevitable in the long run Firms can attempt to keep their product differentiated through branding andor advertising or they can nd new ways of producing an existing product at a lower costs Ifa monopolistically competitive rm fail to do these things then the long run situation will be the one drawn a ove K 39 quot 39 39 39 competitive o Monop olistic ally Competitive rms charge a price greater than MC L A i r A ATC University of CaliforniaDavis TA Jason Lee Economics lAIntro to Micro Email jawleeucdavisedu Handout 4 I Externalities An externality is defined as a cost or benefit related to the production or consumption of some good that is imposed on people not participating in the market Sometimes market transactions between two people also affect society Externalities are fairly common Some De nitions Production Externality An externality related to a production of a good Consumption ExternalityAn externality related to the consumption of a good Private Bene tThe increase in consumer s happiness from the consumption of l more unit of a good or service this is equivalent to the usual demand curve Private CostThe increase in a firm s costs when it produces one more unit this is equivalent to the usual supply curve The word private is used to emphasize the people in the market the actual buyers and sellers of a good or service As opposed to social which is used to emphasize the entire society not just the actual buyers and sellers Social Bene tThe total benefit from the consumption of a good including the private benefit and any externality Social CostThe total cost from the production of a good including both the private cost and any externality When there is no externality on the production side then social costs private costs When there is no externality on the consumption side then social benefits private benefits Economic Efficiency occurs when social costs social benefits In general when there is a negative externality the market will end up producing too much of a good than what is socially optimal When there is a positive externality the market will end up producing too little of a good than what is socially optimal Example 1 Negative Production Extemality In a negative production externality the producer does not face the entire costs of production For example an oil refinery generates air pollution in its production of oil Because of the air pollution people in the community are worse off perhaps due to diminished health or due to diminished ability to view the surrounding nature etc Examine Figure 1 Since there are negative costs to the production of oil this implies that the social cost curve is to the left of the private cost curve At the original level of production social costs are higher than social benefits thus this quantity is not efficient The reason for the market failure is that the market participants do not factor in the full social costs of their harmful economic activities There is a divergence between social costs and private costs which is the negative externality Note that there is no externality on the consumption side so private benefit social benefit the demand curve is the same
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