HAT Manifesto Part 1/3 - Rubric Cube - 241201 revision

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART 5  Firm Behavior and the Organization of Industry

Chapter 15 of 36  Monopoly

Section 12 of 34

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Chapter 14 Figure 1 here

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Figure 4 here

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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.

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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

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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

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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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