University of Hawai‘i at MānoaDepartment of Economics

ECON 130 (003): Principles of Economics (Micro)

http://www2.hawaii.edu/~lindoj

Gerard Russo

Lecture #23

Tuesday, April 6, 2004

ANNOUNCEMENTSLAST LECTURETuesday, May 4, 2004, 12:00-1:15 PM,

BIL 152

Review SessionThursday, May 6, 4:30-5:30 PM, BIL 152

FINAL EXAMINATION Thursday, May 13, 2004, 12:00-2:00 PM,

BIL 152

LECTURE 23Monopoly

Welfare Implications of Monopoly Pricing

MONOPOLYMonopolyOne FirmPrice MakerHomogeneous ProductNo Entry

The Monopolist’s DemandAverage RevenueTotal RevenueMarginal Revenue

Monopoly Profit Maximization

Marginal Revenue=Marginal Cost

MR=MC

Monopoly Revenue

Inverse Demand: P=a – bQ

Price=Average RevenueP=AR, Rule of one price.

AR=P=a – bQ

Total Revenue=TR=PQ=aQ – bQ2

Marginal Revenue=MR=a – 2bQ

$/Q

Q

Q0

0

$

Inverse Demand:AR=P=a-bQ

TR=aQ-bQ2

MR=a-2bQ

$/Q

Q

Q0

0

$

Inverse Demand:AR=P=a-bQ

TR=aQ-bQ2

MR=a-2bQ

elasticity = -1

elasticity = - infinity

elasticity = 0

$/Q

Q

MC ATC

AVCP0•

0

b•

a•

• f

• j

• g

Q0

• h

Profit Maximizing Monopolist (non-discriminating)

c•

Marginal Revenue

Demand

Total revenue equals the area of rectangle 0P0fQ0.Total cost equals the area of rectangle 0cgQ0.Profit equals the area of rectangle cP0fg.

$/Q

Q

MC ATC

AVCP0•

0

b•

a•

• f

• j

• g

Q0

• h

Are Economic Profits Positive, Negative or Zero?Shut-Down or Continue to Operate?

c•

D

MR

$/Q

Q

MCATC

AVC

0

Are Economic Profits Positive, Negative or Zero?Shut-Down or Continue to Operate?

D

MR

$/Q

Q

LRS

0

D

Competition

PC

QC

A

B

Gross Social Benefits = A + BSocial Cost = BNet Social Benefits = A

$/Q

QMR

LRS:LMC=LATC

0D

Competition

PC

QC

Gross Social Benefits = A+B+E+F+G+H+J+KSocial Cost = H+J+KNet Social Benefits = A+B+E+F+G

PM

QM

A B

EF

G

HJ K

$/Q

QMR

LRS:LMC=LATC

0D

CompetitionGross Social Benefits = A+B+E+F+G+H+J+KSocial Cost = H+J+KNet Social Benefits = A+B+E+F+G

PC

QC

PM

QM

A B

EF

G

HJ K

MonopolyGross Social Benefits = A+B+E+F+HSocial Cost = HNet Social Benefits = A+B+E+F