University of Hawai‘i at Mānoa Department of Economics

University of Hawai‘i at MānoaDepartment of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #23 Tuesday, April 6, 2004

ANNOUNCEMENTS • LAST LECTURE • Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 • Review Session • Thursday, May 6, 4:30-5:30 PM, BIL 152 • FINAL EXAMINATION • Thursday, May 13, 2004, 12:00-2:00 PM, BIL 152

LECTURE 23 • Monopoly • Welfare Implications of Monopoly Pricing

MONOPOLY • Monopoly • One Firm • Price Maker • Homogeneous Product • No Entry • The Monopolist’s Demand • Average Revenue • Total Revenue • Marginal Revenue

Monopoly Profit Maximization • Marginal Revenue=Marginal Cost • MR=MC

Monopoly Revenue • Inverse Demand: P=a – bQ • Price=Average Revenue • P=AR, Rule of one price. • AR=P=a – bQ • Total Revenue=TR=PQ=aQ – bQ2 • Marginal Revenue=MR=a – 2bQ

$/Q Inverse Demand: AR=P=a-bQ MR=a-2bQ 0 $ Q TR=aQ-bQ2 0 Q

$/Q elasticity = - infinity elasticity = -1 Inverse Demand: AR=P=a-bQ elasticity = 0 MR=a-2bQ 0 $ Q TR=aQ-bQ2 0 Q

Profit Maximizing Monopolist (non-discriminating) $/Q Total revenue equals the area of rectangle 0P0fQ0. Total cost equals the area of rectangle 0cgQ0. Profit equals the area of rectangle cP0fg. MC ATC P0• • f AVC • g c• b• • h • j a• Demand 0 Q0 Q Marginal Revenue

Are Economic Profits Positive, Negative or Zero? Shut-Down or Continue to Operate? $/Q MC ATC c• • f AVC • g P0• b• • h a• • j D 0 Q0 Q MR

Are Economic Profits Positive, Negative or Zero? Shut-Down or Continue to Operate? $/Q ATC MC AVC D 0 Q MR

Competition $/Q Gross Social Benefits = A + B Social Cost = B Net Social Benefits = A A PC LRS B D 0 QC Q

Competition $/Q Gross Social Benefits = A+B+E+F+G+H+J+K Social Cost = H+J+K Net Social Benefits = A+B+E+F+G B A PM F E G LRS: LMC=LATC PC H K J D 0 QC QM Q MR

Competition Gross Social Benefits = A+B+E+F+G+H+J+K Social Cost = H+J+K Net Social Benefits = A+B+E+F+G $/Q Monopoly Gross Social Benefits = A+B+E+F+H Social Cost = H Net Social Benefits = A+B+E+F B A PM F E G LRS: LMC=LATC PC H K J D 0 QC QM Q MR

University of Hawai‘i at Mānoa Department of Economics