Chapter 11 & 13; Monopoly & Monopolistic Competition

Monopoly

the only supplier of a good that has no close substitute

Profit maximization in monopoly

Set MR = MC
MR = dR/dQ

Important distinction about prices in monopoly vs perfect competition

In PC, price is constant - MR = P

In M, price is a function of Q - market demand is monopoly demand (q = Q)

Revenue formula in Monopoly

R = P(Q)Q

Steps to find MR in monopoly

(Given demand function)

1. Find inverse demand function (P = Q)

2. Plug inverse demand function into R (R = (100 - Q)(Q))

3. Find derivative of revenue function dR/dQ

(*Remember that MR is half of D)

Price elasticity of demand equation

E = dQ/dP x P/Q

Relationship between price elasticity of demand and revenue

If demand is inelastic: P rises, R rises

If demand is elastic: Price rises, R falls

Do ever want to set price in elastic section?

No

How to find profit maximization in monopoly?

Given demand function and cost function

• Find derivative of revenue function to find MR

• Set MR = MC (derivative of cost function)

• Find P and Q

Long-run profit in monopoly is ___, compared to MC and PC.

greater than or equal to 0.

Monopolistic competition

a market structure in which firms have market power but no additional firm can enter and earn positive profits.

Some properties of monopolistic competition (4)

• Price setter

• Free entry

• Differentiated products, close substitution

• Zero economic profit in LR

Monopolistic competition in the SR versus the LR

• Make profit in the SR, as more firms enter in the LR reach zero economic profit