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When does monopoly occur?
Monopoly occurs when there is one large seller of a particular good or service. There is no competition whatsoever in a monopoly.
Few firms are pure monopolists in the real world. This often results from regulation.
However, we can find near-examples such as Amazon, Google, and Facebook.
What is market concentration?
Market concentration describes the degree to which a small number of firms dominate a market.
High market concentration often results in reduced competition.
Describe the market structure of monoploy
Number of sellers = one large seller
Barriers to entry = high
Product substitutability = differentiated
Explain a firm’s revenue
A firm’s revenue is: R = pq
A firm’s marginal revenue, MR, is the change in its revenue from selling one more unit. MR = DR / Dq
If the firm sells exactly one more unit,
Dq = 1, its marginal revenue is MR DR .
We know that for a competitive firm, MR = ΔTR = P* - does this hold for a monopolist?
Explain how marginal revenue and price differs from a competitive firm
The marginal revenue of a monopoly differs from that of a competitive firm because the monopoly faces a downward-sloping demand curve unlike the competitive firm.
Thus, the monopoly’s marginal revenue curve lies below the demand curve at every positive quantity.
For a competitive firm, P=MR (both are represented by a horizontal line).
For a monopoly, P>MR (represented by two separate downward-sloping lines).
How do you derive the marginal revenue curve as a function of P?
Decompose the change in TR due to selling one more unit into 2 parts:
1) For a monopoly to increase its output by ΔQ, the monopoly lowers its price per unit by (the slope of the demand curve).
By lowering its price, the monopoly loses: (change in p/change in Q) x Q
on the Q units it originally sold at the higher price,
2) But it earns an additional p on the extra output.
Thus, the monopoly’s marginal revenue is: MR = p + change in p/change in Q x Q
Demand curve slopes downward
Delta P/Delta Q < 0
The second term of the RHS < 0
MR<P
What is PED?
Basic def: PED measures the percentage change in quantity demanded in response to a percentage change in price.
2nd method: Transformed formula: two components: