Super Profit Increase Summary

Oct 15, 2024

Learning Instructions: Monopolist's Profit Maximization Decision

Introduction

  • Summary of Previous Video: We discussed perfect competition, market entry definition, and barriers.
  • Current Topic: Monopolist's Profit Maximization Decision.

Most Important Parameters

  • Profit = Total Revenue - Total Cost = Q × P - ATC
  • Important parameters: Price (P), Quantity (Q), Average Total Cost (ATC)

Difference between Perfect Competition and Monopolist

  • Price Taker vs. Price Maker:
    • Perfect Competition: Price taker, demand curve represented horizontally.
    • Monopolist: Price maker, has power over the price.
  • Demand Curve:
    • Monopolist: Downward-sloping demand curve; monopolist's demand curve = market demand curve.
    • Perfect Competition: Horizontal demand curve.

Monopolist's Demand and Marginal Revenue

  • Monopolist's Demand Curve: Downward-sloping.
  • Marginal Revenue Curve: Located below the demand curve.
  • Example: If the price decreases, the quantity demanded increases.

Calculation of Revenues and Marginal Values

  • Total Revenue = Price (P) × Quantity (Q)
  • Marginal Revenue (MR) = Change in Total Revenue / Change in Quantity

Steps to Maximize Profits

  1. Find the Point where Marginal Revenue (MR) equals Marginal Cost (MC):
    • Determine the production level where MR = MC.
  2. Determine the Price:
    • From the point MR=MC go up to the demand curve and determine the price.
  3. Determine the ATC:
    • Use the quantity to find the ATC.

Graphical Analysis

  • Downward-Sloping Demand Curve
  • Marginal Revenue Curve: Below the demand curve.
  • Cost Curves:
    • MC curve similar to a Nike "swoosh".
    • ATC curve U-shaped.
  • Find the point where MR = MC to determine the quantity (Q).
  • Go up to the demand curve to find the price (P).
  • Go down to the ATC curve to find the ATC.

Profits vs. Losses

  • Profit: If price > ATC.
  • Loss: If price < ATC.
  • Example: Monopolists can also incur losses.

Conclusion

  • Understanding: Through graphical analysis, monopolists can discern profits or losses.
  • Next Step: Continue solving monopolist graphical problems.

Note: Exercises for a detailed study are available on Brightspace. Remember the importance of the relation between ATC and the price in assessing profits or losses.