imperfect competition
DESCRIPTION
Imperfect Competition. Pure Monopoly. The Price changes at each point by $1.50. But the marginal revenue changes at each point by $3.00! Marginal revenue decreases more quickly than average revenue. Will the monopolist ever operate on the inelastic portion of the demand curve?. - PowerPoint PPT PresentationTRANSCRIPT
Imperfect Competition
Pure
Monopoly
Price
(Average Revenue)
Quantity
Demanded
(Q)
Total
Revenue
(R)
Change in
Total Revenue
(ΔR)
Marginal
Revenue
(ΔR / ΔQ)
$13.50 0 $0
12.00 100 1,200 $1,200 $12.00
10.50 200 2,100 900 9.00
9.00 300 2,700
7.50 400
6.00 500 3,000 0 0
4.50 600 2,700 -300 -3.00
Price
(Average Revenue)
Quantity
Demanded
(Q)
Total
Revenue
(R)
Change in
Total Revenue
(ΔR)
Marginal
Revenue
(ΔR / ΔQ)
$13.50 0 $0
12.00 100 1,200 $1,200 $12.00
10.50 200 2,100 900 9.00
9.00 300 2,700 600 6.00
7.50 400 3,000 300 3.00
6.00 500 3,000 0 0
4.50 600 2,700 -300 -3.00
The Price changes at each point by $1.50
But the marginal revenue changes at each point by
$3.00!
Marginal revenue decreases more quickly than average revenue
Will the monopolist ever operate on the inelastic portion of the
demand curve?
No, the monopolist will never operate on the inelastic portion of the demand curve, because Total Revenue will
decline as Price declines beyond the mid-point of the demand curve.
Remember the Arc method of elasticity of demand!
Even though marginal revenue is declining, total revenue is
increasing, up to the mid-point
Beyond the mid-point, marginal revenue is
negative, and total revenue begins to decline
$12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3100 200 300 400 500 600
Co
sts
/ R
eve
nu
e
Quantity
MR
D (AR)
Quick review: In the elastic portion of the curve, a change in price results in a bigger percent change in quantity demanded
Like the competitive firm, the monopolist will maximize profit at
the point of output where marginal cost equals
marginal revenue
The MC = MR rule
Quantity of
Output
Total
Cost
Marginal Cost
Average
Total
Cost
Total Revenue
Marginal Revenue
Average
Revenue
(Price
0 $0 - $0 $0 - $0
1 900 $900 900 1,200 $1,200 1,200
2 1,600 700 800 2,100 900 1,050
3 2,100 700 2,700 900
4 2,400 3,000 300
5 3,000 600 3,000
6 4,200 1,200 2,700 -300
Quantity of
Output
Total
Cost
Marginal Cost
Average
Total
Cost
Total Revenue
Marginal Revenue
Average
Revenue
(Price
0 $0 - $0 $0 - $0
1 900 $900 900 1,200 $1,200 1,200
2 1,600 700 800 2,100 900 1,050
3 2,100 500 700 2,700 600 900
4 2,400 300 600 3,000 300 750
5 3,000 600 600 3,000 0 600
6 4,200 1,200 700 2,700 -300 450
But, because the marginal revenue
curve is below the demand curve,
The price at the output level where MC = MR is higher
than for a firm in a competitive market, orP > MC not P = MC
$1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
-100
-200
-300 1 2 3 4 5 6
Co
sts
/ R
even
ue
Quantity of Output
MR
D (AR)
MC
ATC
MC=MR
P=$750Profit
• A profit maximizing monopolist would produce an output of 4 units.
• At this level of output, MC is $300 per unit and MR is $300 per unit.
• At this level of output, ATC is $600 per unit and AR (price) is $750 per unit.
• This gives the monopolist an economic profit of $150 per unit for a total economic profit of $600 ($150 x 4)
So, The monopolist is inefficient.
The marginal cost of the firm is equal to demand (allocative efficiency) at a price of
$600 and output of 5 units.
But the monopolist charges a higher price and produces less
($750)(4 units) than a firm operating in an efficient
competitive market
$1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
-100
-200
-300 1 2 3 4 5 6
Co
sts
/ R
even
ue
Quantity of Output
MR
D (AR)
MC
ATC
Deadweight loss
MC=MR