Chapter 4 Outline
A. Demand
1. Because the monopolist is a single seller, it faces the market demand curve for the product produced.
a. This demand curve is negatively sloped and shows that the monopolist can sell more output only by lowering the price of the product.
1. This means that the output the monopolist chooses to sell affects price.
B. Marginal Revenue
1. Marginal revenue is the change in total revenue associated with selling one more unit of output.
a. It is the private benefit to the monopolist of selling one more unit.
2. For a monopolist, marginal revenue is less than price.
a. Because the monopolist must lower the price on all units in order to sell additional units, marginal revenue is less than price.
b. Because marginal revenue is less than price, the marginal revenue curve will lie below the demand curve.
1. Because demand represents marginal social benefit and marginal revenue represents marginal private benefit, marginal social benefit is greater than industry marginal private benefit in monopoly.
C. The Marginal Principle
1. In choosing the output to produce, the monopolist follows the marginal principle.
a. This principle states the profit maximizing output is that output where marginal revenue equals marginal cost.
1. If marginal revenue is greater than marginal cost, the monopolist should increase output.
2. If marginal revenue is less than marginal cost, the monopolist should decrease output.
D. Monopoly and Competition Compared
1. Unlike a competitive industry, a monopoly does not produce the efficient output. Monopolists charge a higher price and produce less output than a competitive industry.
a. Efficient output occurs where marginal social cost and marginal social benefit are equal.
b. Inefficiency occurs because of the divergence between marginal social benefit and marginal social cost.
1. At the output produced by the monopolist, marginal social benefit exceeds marginal social cost.
a. The value to consumers of an additional unit exceeds the value of the units of other goods given up to produce the additional unit - the opportunity cost.
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