Microeconomics unit 3 MONOPOLY AND PRICE
DISCRIMINATION
MONOPOLY AND PRICE DISCRIMINATION
1 MONOPOLY: CONCEPT AND CAUSES
A monopoly is a market structure where the unique seller of commodity with no substitute
provides the entire market.
Market:
- Monopolist: price-decider (it has market power and it’s able to affect prices)
- Competitive firms; price-takers
Why does a monopoly appear?
- Ownership: 1 firm has the control of the resources
- Scale economies: 1 firm can supply the whole market at a lower cost
- Patents: It prevents others from using an invention without the consent of the owner
- Network economies: the products value increases with the nuum consumers
- An exclusive franchise serves the market: public utility services
2 THE MONOPOLIST PROFIT MAXIMIZATION
Notation:
- P(q): inverse demand curve
- TC(q): monopolist’s total cost
- MC(q): Marginal cost MC(q)= → (q)
δq
δT C
- R(q): Monopolist’s revenue R(q)=P(q)·q→
- MR(q): Marginal revenue → (q)
δq
δR
PROFIT MAXIMIZATION Π (q) (q)C(q) Π = R−T→δq
δΠ = 0
The price elasticity ( ) of demand shows the responsiveness of the quantity demanded of a ε
good or service to a change in tits price.
(q)ε = δq/q
δp//p
3 LERNER INDEX
The Lerner Index reflects market power
IL =P(q)
P(q)−MC (q)
- LI=0 No market power→
- LI=1 Maximum market power→
