profit maximization and monopolies

sources of market failure

1. imperfect market structure or imperfect competition 2. existence of public goods 3. presence of external costs and benefits 4. imperfect information

imperfect market structures

1. monopoly- single producer 2. monopolistic competition 3. oligarchy- few really large firms

conditions for ability to price discriminate

1. must be a price maker 2. must be able to identify and segment market 3. must be able to prevent arbitrage

characteristics of a monopoly

1. single firm 2. unique product 3. imposible entry into market

long-run profits

entry is impossible, therefore monopolists can continue to earn profits in the long-run

one-unit change in Q

MR= P+change in P(Q-1). this formula implies that marginal revenue will always be less than price (except for q=1)

profit maximization

MR=MC just like competitive; MR can't equal P

marginal revenue

change in TR/change in Q. the monopolist gains revenue from selling the last unit, but loses revenue from lowering the price of the previous units sold

price discrimination

charging different prices to different buyers

profit

maximizing level of output (MR crosses MC) x price (demand curve)- " " x price (AC curve)

perfect price discrimination

occurs when a firm charges the max amount consumers are willing to pay for each unit; the firm will produce the efficient quantity of output, no deadweight loss but all of the consumer surplus is transferred to the producer

market failure

occurs when resources are misallocated, or allocated inefficiently resulting in waste or lost value

deadweight loss

reducing output and increasing price

monopoly

single firm producing a product with close substitutes and limited control over the market price

predatory pricing

the pricing of goods or services at such a low level that other suppliers cannot compete and are forced to leave the market