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Output and price determination
Cost data:
MR=MC rule: A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC.
How to determine the profit-maximizing output, profit-maximizing price, & economic profit (or minimized loss) in PM industries:
No monopoly supply curve:
Misconceptions concerning monopoly pricing:
Possibility of losses by monopolist:
- Assumption - a pure monopolist hires resources competitively and has the same technology as a purely competitive firm.
MR=MC rule: A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC.
- Profit maximizing price: Find MC= MR and draw a vertical line up to the demand curve.
- Draw a horizontal line. This is the price they set.
How to determine the profit-maximizing output, profit-maximizing price, & economic profit (or minimized loss) in PM industries:
- Find the profit-maximizing output at the point where MR = MC.
- Draw a vertical line upward from Qpm to the demand curve.
- Determine the economic profit using one of two methods:
Method I: Find profit/unit by subtracting ATC of Qpm from Ppm. Then multiply the difference by Qpm to determined economic profit. (In other words, Economic Profit = (P - ATC) x Qpm )
Method II: Find TC by multiplying ATC of Qpm by Qpm. Find TR by multiplying Qpm by Ppm. Then subtract TC from TR to determine economic profit. (In other words, Economic Profit = TR-TC )
No monopoly supply curve:
- No unique relationship between price and quantity supplied for a monopolist → no supply curve
- Because the monopolist does not equate marginal cost to price, it is possible for different demand conditions to bring about different prices for the same output
Misconceptions concerning monopoly pricing:
- Not Highest Price:
- Misconception: Monopolists will charge highest price possible because they can manipulate output & price
- Monopolies still face consumer demand. If the price is too high, consumers won't buy their products, and profits are decreased.
- Although there are many prices above Pm, monopolists don't charge at those prices because they would yield a smaller-than-maximum total profit. (High prices would potentially reduce sales and total revenue too severely to offset any decrease in total cost)
- Monopolist seek maximum total profit, NOT the maximum price
- Total, Not Unit, Profit:
- Output level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.
- Output level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.
Possibility of losses by monopolist:
- Pure monopolist’s likelihood of earning economic profit greater than that of purely competitive firm’s
- PC – long-run – destined to earn only normal profit
- PM has high barriers of entry; therefore, the concept of “entry eliminates profits” does no apply to PM
- Pure monopoly does not guarantee profit:
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- Monopoly is not immune from upward-shifting cost curves caused by escalating resource prices
- Monopoly is not immune from changes in tastes that reduce the demand for its product
- Both of these factors can lead to losses - initially it will persist in operating at a loss and to stop incurring loss, the firm's owners will reallocate their resources
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, Nov 19 2007, 4:58 PM EST
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