Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior
and the Organization of Industry
Chapter
15 of 36 Monopoly
Section
12 of 34
…
Chapter
14 Figure 1 here
…
Figure 4 here
…
Per
Figure 4, to maximize profit, the monopoly firm adjusts its level of production
until the quantity reaches QMAX, where marginal revenue equals marginal
cost.
The monopoly’s profit maximizing quantity of output
is determined by the intersection of the marginal revenue curve and the marginal cost curve.
This
occurs at point A.
…
Competitive
firms also choose the quantity of output at which marginal revenue equals
marginal cost, point A on Figure 1.
The
rule of where marginal revenue equals marginal cost for profit maximization
applies to both competitive and monopoly firms.
Any
company
· makes
more unit if the additional (marginal) revenue is more than the additional (marginal)
revenue
· makes
one less unit if the additional revenue is less than the additional cost
…
For
a competitive firm, profit maximization quantity is where
·
Marginal Revenue (MR) equals Price (P)
· P
= MR = Marginal Cost (MC)
For
a monopoly firm, profit maximization quantity is where
· MR
is less than its P, in Figure 4 point A is below point B
· P > MR = MC, price is higher than the point
where MR = MC
…
The key
difference between competitive and monopoly markets is
· in competitive markets, the firm’s price
equals marginal cost
· in monopoly markets, the firm’s price exceeds marginal
cost
As a
result
· competitive
firms don’t earn economic profits because price = marginal cost, price = cost
· monopoly
firms do earn economic profits because price > marginal cost, price >
cost
… …
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