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How Does a Monopoly Choose Price and Output

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... Price and Output for a Monopolist. 14 - 2. LEARNING OBJECTIVE ... Don't Assume That Charging a Higher Price Is Always More Profitable For a Monopolist ... – PowerPoint PPT presentation

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Title: How Does a Monopoly Choose Price and Output


1
How Does a Monopoly Choose Price and Output?
  • Marginal Revenue Once Again
  • Remember that when a firm cuts the price of a
    product, one good thing and one bad thing
    happens
  • The good thing It sells more units of the
    product.
  • The bad thing It receives less revenue from
    each unit than it would have received at the
    higher price.

2
How Does a Monopoly Choose Price and Output?
  • Marginal Revenue Once Again

3
How Does a Monopoly Choose Price and Output?
  • Profit Maximization For a Monopolist

4
  • Finding Profit Maximizing Price and Output for a
    Monopolist

Dont Assume That Charging a Higher Price Is
Always More Profitable For a Monopolist
5
Does Monopoly Reduce Economic Efficiency?
  • Comparing Monopoly and Competition

6
Does Monopoly Reduce Economic Efficiency?
  • Measuring the Efficiency Losses from Monopoly
  • We can summarize the effects of monopoly as
    follows
  • Monopoly causes a reduction in consumer surplus.
  • Monopoly causes an increase in producer surplus.
  • Monopoly causes a deadweight loss, which
    represents a reduction in economic efficiency.

7
Does Monopoly Reduce Economic Efficiency?
  • How Large Are the Efficiency Losses Due to
    Monopoly?
  • Market power The ability of a firm to charge a
    price greater than marginal cost.
  • Market Power and Technological Change
  • The introduction of new products requires firms
    to spend funds on research and development.
    Because firms with market power are more likely
    to earn economic profits, they are also more
    likely to introduce new products.

8
Government Policy toward Monopoly
  • Collusion An agreement among firms to charge
    the same price, or to otherwise not compete.
  • Antitrust Laws and Antitrust Enforcement
  • Antitrust laws Laws aimed at eliminating
    collusion and promoting competition among firms.
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