Monopoly to Competition in India Coal Mining Paper

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find an article from a newspaper or magazine that relates to something we have done at any time throughout the class. To receive credits, you must satisfy the following: (2) You must provide me with a copy of the article and clearly mark the reference (the source, the date, page number, etc.). The article may not be over 6 months old. (3) You must type up a one-half to one page discussion that describes how the issue relates to the material we have covered in class (indicate this with a chapter number if possible).

I have attached the chapter

8/21/2013
Introduction:
Thinking Like an Economist
CHAPTER
CHAPTER 14
1
Monopoly and
Monopolistic Competition
14
1
Chapter Goals
 Summarize how and why the decisions facing a
monopolist differ from the collective decisions of
competing firms
Monopoly and Monopolistic Competition
 Determine a monopolist’s price, output, and profit
graphically and numerically
Monopoly is business at the end of
its journey.
 Show graphically the welfare loss from monopoly
— Henry Demarest Lloyd
 Explain why there would be no monopoly without
barriers to entry
 Explain how monopolistic competition differs from
monopoly and perfect competition
14-2
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Monopoly and
Monopolistic Competition
14
1
A Monopolistic Market
 Monopoly is a market structure in which one firm makes up
the entire market
Monopoly and
Monopolistic Competition
14
1
The Key Difference Between
a Monopolist and a Perfect Competitor
 A monopolistic firm’s marginal revenue is not its price
• Marginal revenue is always below its price
 Barriers to entry into the market prevent competition
• Marginal revenue changes as output changes
and is not equal to the price
 Barriers to entry can be:
• Legal
• Sociological
• Natural
• Technological
 A monopolistic firm’s output decision can affect price
 There is no competition in monopolistic markets so
monopolists see to it that monopolists, not consumers,
benefit
 There are no close substitutes for the monopolist’s product
14-3
Monopoly and
Monopolistic Competition
14-4
14
1
Determining the Monopolist’s
Price and Output Numerically
Monopoly and
Monopolistic Competition
14
1
Determining the Monopolist’s
Price and Output Numerically
 The goal of the monopolistic firm is to maximize profits,
the difference between total revenue and total cost
 The profit-maximizing condition of a monopolistic firm is:

 The monopoly maximizes profit when marginal revenue
equals marginal cost
MR = MC
 For a monopolistic firm, MR < P
 A monopolistic firm maximizes total profit, not profit per unit
 Marginal revenue (MR) is the change in total revenue
associated with a change in quantity
If MR > MC,
• The monopoly can increase profit by increasing output
 Marginal cost (MC) is the change in total cost associated
with a change in quantity
If MR < MC,
• The monopoly can increase profit by decreasing its output
14-5
14-6
1
8/21/2013
Monopoly and
Monopolistic Competition
Monopolistic Profit Maximization
Table
Q
P ($) TR ($) MR ($) TC ($) MC ($) ATC ($) Profit ($)
0
36
0
1
33
33
2
30
60
3
27
81
4
24
96
5
21
105
6
18
108
7
15
105
8
12
96
9
9
81
47
33
1
48
27
2
50
21
4
54
15
8
62
9
16
78
3
54
102
-3
40
142
-9
56
198
-15
80
278

-47
48.00
-15
25.00
10
18.00
27
15.50
34
15.60
27
17.00
6
20.29
-37
24.75
-102
30.89
-197
14
1
14
1
Monopoly and
Monopolistic Competition
Monopolistic Profit Maximization Graph
The profitmaximizing
condition is:
MR = MR
Marginal revenue is not constant
as Q increases because:
• revenue increases as the
monopolist sells more
• revenue decreases because the
monopolist must lower the price
to sell more
P
$36
If MC < MR,
increase
production
Profit maximizing
quantity is where
MC = MR
Monopolist Price:
D at Qprofit max
$24
$20.50
MC
Competitive
Price
MC = MR
If MC > MR,
decrease
production
D
MR
Q
4 (profit max)
Find output where MC = MR,
this is the profit maximizing Q
Find how much consumers will
pay where the profit max Q
intersects demand, this is the
monopolist price
14-7
Monopoly and
Monopolistic Competition
14
1
Comparing Monopoly and Perfect Competition
• In a monopoly, P>MR,
• In perfect competition, P=MR=D
• MR=MC is the profit max rule for
both
P
MC
First find the monopoly
Q and P
PM
PPC
DPC= MRPC
DM
MRM
Q
QM QPC
14-8
Find output where
MC = MR, this is the profit
maximizing Q
Determining Profits Graphically:
A Firm with Profit
P
Find how much consumers
will pay where the profit
max Q intersects demand,
this is the monopolist price
Find profit per unit where
the profit max Q
intersects ATC
Then find the perfectly
competitive Q and P
14
1
Monopoly and
Monopolistic Competition
MC
D at Qprofit max
P
ATC
ATC
Profits
ATC at Qprofit max
MC = MR
Outcome: Monopoly output
is lower and price is higher
than perfect competition
D
Since P>ATC at the
profit maximizing quantity,
this firm is earning profits
MR
Q
Qprofit max
14-9
Monopoly and
Monopolistic Competition
Determining Profits Graphically:
A Firm with Zero Profit or Losses
14-10
14
1
14
1
Monopoly and
Monopolistic Competition
Find output where
MC = MR, this is the profit
maximizing Q
Find output where
MC = MR, this is the profit
maximizing Q
Find how much consumers
will pay where the profit
max Q intersects demand,
this is the monopolist price
Find how much consumers
will pay where the profit
max Q intersects demand,
this is the monopolist price
Determining Profits Graphically:
A Firm with Losses
P
P
MC
ATC
D at Qprofit max
P
=ATC
ATC at Qprofit max
Find profit per unit where
the profit max Q
intersects ATC
MC = MR
D
MR
Qprofit max
Q
Since P=ATC at the
profit maximizing quantity,
this firm is earning
zero profit or loss
14-11
Find profit per unit where
the profit max Q
intersects ATC
Since P min ATC
• In perfect competition in the
long run, P = min ATC
Outcome:
Monopolistic competition
output is lower and
price is higher than
perfect competition
14-21
Monopoly and
Monopolistic Competition
14
1
14-22
14
1
Comparing Monopolistic Competition with
Monopoly
Monopoly and
Monopolistic Competition
14
1
Advertising and Monopolistic Competition
 It is possible for the monopolist to make economic
profit in the long run because of the existence of
barriers to entry
 Perfectly competitive firms have no incentive to
advertise, but monopolistic competitors do
 The goals of advertising are to increase demand and
make demand more inelastic
 No long-run economic profit is possible in
monopolistic competition because there are no
significant barriers to entry
 Advertising increases ATC
 For a monopolistic competitor in long-run equilibrium,
(P = ATC) ≥ (MC = MR)
 The increase in cost of a monopolistically competitive
product is the cost of “differentness”
14-23
14-24
4
8/21/2013
Monopoly and
Monopolistic Competition
14
1
Monopoly and
Monopolistic Competition
Chapter Summary
Chapter Summary
 A monopolist maximizes profit or minimizes losses where
MR=MC
 A price-discriminating monopolist earns more profit than
a normal monopolist by charging a higher price to those
with less elastic demand and a lower price to those with
more elastic demand
 To determine a monopolist’s profit or loss: Find output
where MR=MC; Determine price and ATC at that output;
Profit or loss = (P – ATC) * Q
14
1
 Three important barriers to entry are natural ability,
economies of scale, and government restrictions
 Because monopolies reduce output and charge P > MC,
monopolies create a welfare loss for society
 Monopolistic competition is characterized by many
sellers, differentiated products, multiple dimensions of
competition, and ease of entry for new firms
 Monopoly output is lower and price is higher than in
competitive markets
 Natural monopolies exist in industries with strong
economies of scale
 A monopolistic competitor differs from a monopolist in
that a monopolistic competitor makes zero economic
profit in long-run equilibrium
14-25
14-26
5

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