MR and Elasticity of Demand

We can rewrite the MR

Curve as follows:
MR P+ QAP/AQ
= P(1+(Q/P)(AP/AQ))

= P(1 +1/e)

where: & is the price elasticity of

demand, (P/Q(AQIAP)
25
MR and Elasticity of Demand

Therefore,
will always operate on the elastic
The monopolist
of the market demand curve
region

26
 Profit-Maximization

maximizes
LIke a competitive firm, a monopolist
MC.
profit by producing the quantitywhere MR=
Once the monopolist identifies this quantity,
it sets the highest price consumers are willing to
pay for that quantity.

It finds this price from the D curve.

MONOPOLY 27
 Profit-Maximization

Costs and
1. The profit- Revenue MC
maximizing Q
is where P
MR MC.
2. Find P from
D
the demand
Curve at this Q. MR

Q Quantity
Profit-maximizing output
MONOPOLY 28
 The Monopolist's Profit

Costs and
Revenue MC
As with a P
ATC
competitive firm, ATC
the monopolist's
profit equals
D
(P-ATC) x Q
MR

Q Quantity

MONOPOLY
29
 Long Run Equilibrium of a
Monopoly
The monopolyst creates barriers to enrty for the new firms into
the industry.
The entryinto the industry is blocked by having control over
the raw materials needed for the production
Or, he may hold full rights to the production ofa certain good
(patent)
In the absence of threats of the new firm into the industry
The monopoly firm makes long run adjustments in the scale of

plant

MONOPOLY 30
 Long Run Equilibrium of a
Monopoly
If the demand for the product is limited, the monopolist

can afford to produce output at sub optimum scale

If the market size is large and permits to expand output

optimum scale of plant

then the monopolist would build an

and would produce goods at the minimum cOst per unit

A monopoly firm will not stay in business if he is making

losses in the long run

MONOPOLY
 Long Run Equilibrium of a
Monopoly
The long run equilibrium of a monopoly firm is now explained with
the help of the following diagram.
Y

LMC

K P LAC

N H
R

E B AR
X
ig.16.6 MR Outpuut

MONOPOLY 32