lectures in microeconomics-charles w. upton managing with multiple plants
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Lectures in Microeconomics-Charles W. Upton
Managing with Multiple PlantsMC
AC
cmin
qmin Nqmin
LRMC
SRMC
Managing with Multiple Plants
Handling Multiple Plants
MC
AC
cmin
qmin
Suppose we have many plants with
these MC and AC curves.
Managing with Multiple Plants
The LRMC Curve
MC
AC
cmin
qmin Nqmin
LRMC
SRMC
Managing with Multiple Plants
The LRMC Curve
MC
AC
cmin
qmin Nqmin
LRMC
SRMCLRMC is simply cmin.
SRMC is N x MC of existing plants
Managing with Multiple Plants
A Change in Demand
cmin
Q*
P*
DMR
LRMC
The initial situation
Managing with Multiple Plants
Demand increases. How
does the monopolist respond?
Demand Increases
cmin
Q*
P*
DMR
LRMC
Managing with Multiple Plants
Demand increases. How
does the monopolist respond?
Demand Increases
cmin
Q*
P*
DMR
LRMC
SRMC
Managing with Multiple Plants
Intersection of MC and MR
changes
New Equilibrium
cmin
Q*
P*
DMR
LRMC
SRMC
Managing with Multiple Plants
Price and Output Rise
New Equilibrium
cmin
Q*
P*
DMR
LRMC
SRMC
Managing with Multiple Plants
New Plants!
Expansion
cmin
Q*
P*
DMR
LRMC
Managing with Multiple Plants
New MR=MC
Expansion
cmin
Q*
P*
DMR
LRMC
Managing with Multiple Plants
Lower Price, More Output
Back to LRMC
cmin
Q*
P*
DMR
LRMC
Managing with Multiple Plants
Summary
cmin
Q*
P*
DMR
LRMC
Summary: increase in demand leads to
higher price and output, as
monopolist moves along SRMC. (Red
to Green)
Managing with Multiple Plants
Summary
cmin
Q*
P*
DMR
LRMC
Monopolist builds new plants,
returning to LRMC curve. (Green to Purple). As this
happens, price falls and output rises.
Managing with Multiple Plants
Change in Output
cmin
Q*
P*
DMR
LRMC
Output>Output>Output
Managing with Multiple Plants
Change in Price
cmin
Q*
P*
DMR
LRMC
Output>Output>Output
Price>PricePrice> Price
Price> Price?
Managing with Multiple Plants
But Which Way?
cmin
Q*
P*
DMR
LRMC
Output>Output>Output
Price>PricePrice> Price
Price> Price?
Maybe, maybe not. Depends on impact on .
Managing with Multiple Plants
Introducing New Technologies
Managing with Multiple Plants
The Initial Situation
MCAC
cmin
qmin
Initially, all plants are as shown. cmin is
LRMC.
Managing with Multiple Plants
The Initial Situation
MCAC
cmin
qmin
Initially, all plants are as shown. cmin is
LRMC.If total output = Q, the monopoly
operates N = Q/qmin
plants
Managing with Multiple Plants
A New Technology
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Managing with Multiple Plants
A New Technology
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Lower MC!
Lower AC!
Managing with Multiple Plants
New LRMC
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Managing with Multiple Plants
Operating Level for Old Plants
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Managing with Multiple Plants
Operating Level for Old Plants
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Should old plants be abandoned? Not as
long as c*min is above the minimum
of AVC
Managing with Multiple Plants
The Old Equilibrium
cmin
Q*
p*
DMR
LRMC
Managing with Multiple Plants
New LRMC
cmin
Q*
p*
DMR
LRMC
c*min LRMC
Managing with Multiple Plants
The New Equilibrium
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
Managing with Multiple Plants
Revenue Gain
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
Lose the Grey, gain the Yellow
Managing with Multiple Plants
Revenue Gain-2
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
The Net
Managing with Multiple Plants
Profit Gain
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
Cost Cutting Gains
Revenue Gains
Managing with Multiple Plants
End
©2003 Charles W. Upton
Managing with Multiple Plants
End
©2003 Charles W. Upton