ECON 202 1nd Edition Lecture 26 Outline of Last Lecture I. Perfectly Competitive Industriesa. Profit Maximizationi. In Perfectly Competitive Industries1. Long RunII. Monopolya. Causes of MonopolyOutline of Current Lecture III. Monopolya. Price Makersb. Profit Maximization - Monopoliesc. Compare: Perfectly Competitive Industries and Monopoliesd. Regulating Natural MonopoliesCurrent LectureMonopoliesPrice MakersMonopolies:- Have market power- Have control over the price chargedProfit Maximization - Monopolies Q* = where Marginal Revenue crosses Marginal CostP* = the point on the demand curve where the quantitydemanded = Q*In General: Monopolists maximize profits by producing thequantity of output where MR = MC (Q*) and charges P*If Price > ATC the firms is making a profitThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. $DQMRMCATC$DQMRPROFITSp*ATCQ*If Price = ATC the firm is making 0 profitIf Price < ATC the firm is making a lossBarriers to entry prevent firms from competing away a monopoly. So:A MONOPOLY CAN MAKE PROFITS IN THE LONG RUNCompare Perfectly Competitive Industries to MonopoliesAssumptions: - Everything is in the long run- ATC is constant and is equal to marginal cost (Constant Cost Industry)Perfect Competition MonopolyQ QCQMP PCPMCS ACPCABPMPS 0 BEPCPMDWL 0 BCERegulating Natural MonopoliesAssumptions:- Economies of Scale- Marginal Cost is ConstantTypes of Regulations- Marginal Cost Pricing – force monopolists to charge the price that would occur in perfectcompetitiono Monopolists make a loss, so the government reimburses them till the are doing average- Average Cost Pricing – force monopolists to produce where price = average total costo Monopolist doesn’t make a profit or a losso This removes the incentives to keep costs of production down.$DQMRATC = MCP = min.
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