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