Module 10.2 Monopoly Lecture

Monopoly Pricing and Output Decisions

• Basic Principle:

  • A monopoly sets its price and output by equating marginal revenue (MR) to marginal cost (MC).

  • This fundamental rule applies to all firms, regardless of market power.

• Example of Pricing with Vibranium:

  • Selling 4 grams at $900 per gram yields total revenue:
    4 imes 900 = 3600

  • If the monopoly sells 5 grams, the price per gram from the demand curve is $800.

  • Total revenue from 5 grams:
    5 imes 800 = 4000

  • Marginal Revenue Calculation:

    • MR from 4 to 5 grams:
      4000 - 3600 = 400

  • Price effect versus quantity effect:

    • The additional revenue from the 5th gram is $800,

    • However, the first four grams see a price decrease of $100 each (from $900 to $800):

    • Total loss on first four grams = 4 imes 100 = 400

    • Thus, the effective marginal revenue for the 5th gram is:
      800 - 100 = 700

• Graphical Representation:

  • The marginal cost (MC) and average cost (AC) curves are typically U-shaped.

  • As output increases, the discount effect becomes larger:

  • This is due to the need to offer discounts to more units sold.

• Wakanda Mining's Decision-Making Process:

  • Like any monopoly, they must set MR equal to MC to determine optimal production level.

  • The point where this condition is met determines quantity produced for maximum profit.

• Comparison with Perfect Competition:

  • In a perfectly competitive market:

  • Price equals marginal cost at the equilibrium, where both curves intersect.

  • Deadweight Loss (DWL):

  • Represents inefficiency in monopoly settings due to output levels not being socially optimal.

  • Surplus transferred from consumers to monopolists:

    • Area between competitive price (pc) and monopoly price (pm) extending to monopoly quantity (q_m) represents consumer surplus lost due to monopoly pricing strategies.

• Key Takeaway:

  • Although both monopolists and perfectly competitive firms set MR equal to MC, the outcomes differ significantly in terms of consumer surplus and market efficiency.