Pure Monopoly

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Pure MonopolyFour Market ModelsLO110-An Introduction to Pure MonopolySingle seller – a sole producerNo close substitutes – unique productPrice maker – control over priceBlocked entry – strong barriers to entry block potential competitionNon-price competition – mostly PR or advertising the productLO110-1) Economies of Scale2) Technological SuperiorityTypes of Cost Advantages:Marginal Revenue = Price - Loss from Price Cut on Prior Output.MR < P whenever the firm has to cut its price to sell more.The firm will never produce where MR is negative.Total revenue is largest at the level of output at which MR = 0.When demand is elastic, more output increases total revenue, and so MR > 0. In general we have:Facts about Marginal Revenue:Table 2. How Elasticity of Demand Affects Marginal RevenueFacts about Marginal Revenue:6) Because of 3 and 5 above, a firm will never produce where the firm’s demand is inelastic.7) If the demand schedule is a downward-sloping straight line, then (a) the marginal revenue curve is twice as steep as the demand curve and (b) the MR curve intersects the bottom axis at half the output the demand curve does.8) The total revenue curve shows the total revenue at each level of output. MR is the slope of the total revenue curve.Facts about Marginal Revenue   Basic ElementsMarginal RevenueA monopoly faces a downward-sloping demand curve: To sell more, it must lower its price. Consider the table below:Table 1 : The Effect of Price on Marginal RevenueShort-run rule: Produce where MR = MC if P ³ AVC.Long-run rule: Produce where MR = MC if P ³ ATC.The Output DecisionBarriers to EntryLO110-Monopoly DemandThe pure monopolist is the industry thus firmDemand curve is the market demand curveMarginal revenue < priceMonopolist is a price makerMonopolist sets prices in elastic region of demand curveLO110-Output and Price Determination1-Output and Price Determination0DMRATCMCMR=MCA=\$94Economi

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English.

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Economics.

Country

Pakistan.

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