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# Krug N14b

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### Krug N14b

1. 1. Possible Barriers to Entry “ a market served by a single firm” 14 Monopoly
2. 2. Possible Barriers to Entry (cont.)
3. 3. Monopolist’s Marginal Revenue Demand for New Drug: Slope = \$0.01/dose 999 1,000 1,001 Q \$14.01 \$14.00 \$13.99 Price Marg Rev Revenue
4. 4. Monopolist’s Marginal Revenue Slope \$0.01/dose MR = price + (quantity x slope) \$16 + ( 800 x -\$0.01 ) Market Demand Marginal Revenue 800 900 1,000 1,100 1,200 Q \$16 \$15 \$14 \$13 \$12 Price Marg Rev 7 8 9 10 11 12 13 Doses of drug (100s) Price (\$) 2 4 6 8 10 12 14 16 18
5. 5. Monopoly: price decreases with quantity Monopolist’s Output Decision 800 900 1,000 1,100 1,200 Q 16 15 14 13 12 Price \$6,165 \$6,300 \$6,165 \$5,740 \$5,000 Profit \$8 \$6 \$4 \$2 \$0 Marg Rev Marg Cost \$5.30 \$6.00 \$6.70 \$7.80 \$9.00
6. 6. Average cost Profit for Different Output Decisions Market Demand Output Cost or Price (\$) 300 600 900 1200 1500 3 6 9 12 15 18 21 24
7. 7. Average cost Profit for Different Output Decisions Market Demand Output Cost or Price (\$) 300 600 900 1200 1500 3 6 9 12 15 18 21 24
8. 8. Average cost Profit for Different Output Decisions Market Demand Output Cost or Price (\$) 300 600 900 1200 1500 3 6 9 12 15 18 21 24
9. 9. Marginal cost Monopolist’s Output Decision Marginal Revenue Market Demand Monopoly quantity & price Output Cost or Revenue (\$) 300 600 900 1200 1500 3 6 9 12 15 18 21 24
10. 10. Constant-Cost Industry Average Cost = Marginal Cost Market Demand Marginal Revenue Monopoly quantity & price Perfect competition quantity & price Output Price (\$) 200 400 600 800 1000 5 10 15 20 25 30 35 40
11. 11. Perfect Competition: Constant-Cost Industry Average Cost = Marginal Cost Market Demand Output Price (\$) 200 400 600 800 1000 5 10 15 20 25 30 35 40
12. 12. Monopoly: Constant-Cost Industry Average Cost = Marginal Cost Market Demand Deadweight loss from monopoly Output Price (\$) 200 400 600 800 1000 5 10 15 20 25 30 35 40
13. 13. Monopoly with Price Discrimination Average Cost = Marginal Cost Market Demand Deadweight loss Output Price (\$) 200 400 600 800 1000 5 10 15 20 25 30 35 40
14. 14. Patents <ul><li>government-protected monopolies </li></ul><ul><li>provide monopoly profits to a firm </li></ul><ul><li>encourages R&D and innovation </li></ul>Natural Monopolies <ul><li>economies of scale for very large operations </li></ul><ul><li>inefficient for two firms to provide service </li></ul><ul><li>government often sets maximum price </li></ul>
15. 15. MR Demand MC ATC Regulating the Natural Monopoly ATC slopes downward: large economies of scale Monopolist would choose a price to maximize profit. Output Cost or Revenue (\$) 100 200 300 400 500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
16. 16. MR Demand MC ATC Regulating the Natural Monopoly Regulators will set a lower price… … that satisfies the monopolist and maximizes total surplus Output Cost or Revenue (\$) 100 200 300 400 500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00