Welcome back. You're a monopoly. You get to face the entire market demand curve, and get to pick the best price quantity combination on that demand curve. You have a certain set of costs. What's the best point to pick on the demand curve? That's the subject of this session. And it'll turn out it's the same marginal revenue, marginal cost rule that we developed in looking at firms in perfectly competitive settings. The same basic rule applies. You want to keep expanding output so long as marginal revenue exceeds marginal cost, out to the point where the two are equal And should you reach a point where marginal revenue starts to fall below marginal cost, you've expanded output too much, you've chosen too low a price. Table 11.2 shows why. Now, in this setting, as we'll see, we're in a long-run setting, total cost of output is zero, are equal to zero, so no fixed costs. That's how we know we're in a long run setting. Price and quantity are the first two columns depict a downward-sloping demand curve that you face. Total revenue is just the multiplication of the first two columns. So, the quantity is zero, total revenue is zero. Profit is the difference between total revenue and total cost. Columns six and seven depict the average revenue and average total cost curves. Columns eight and nine look at marginal revenue and marginal cost. Now note that marginal revenue is only equal to price for average revenue at the very first unit. But beyond that, marginal revenue falls below average revenue. It's gotta be dragging down average revenue, or price, as we move down the demand curve, and look what happens. So long as marginal revenue exceeds marginal cost, profit keeps going up. So if we look at the profit column, it keeps rising all the way until we get to an output level of seven. And profit is maximized at 12.21. Roughly where marginal revenue equals marginal cost. Should we go beyond that point, where marginal revenue falls below marginal cost, then profit's falling. It goes below 12.21, down to as low as $8.00, at a quantity and output level of ten. Now, what does this mean graphically? Figure 11.2 should show us, and this is very similar, except here total revenue isn't the straight line, but it's an upside down bowl. Perfect competition, total revenue rises at a flat rate. Marginal revenue or price is, is constant. The firm's a price taker. Where you're a price setter or price chooser, total revenue with a downward sloping demand has a upside down bowl shape to it. And what you want to do, is you want to expand output. And these numbers correspond to the previous table out to an output level of seven. That's where marginal revenue equals marginal cost. And that output level if you shoot it up to the demand curve, indicates the price you ought to be charging, $8.80. That's where profit is maximized. Now if you look at the total curve it's the same intuition we developed last week in the context of perfect competition. So long as the difference between total revenue and total cost, the height difference is expanding, so, so long as the slope out here, marginal revenue of tot, the slope of total revenue is greater than the slope of the total cost curve, you're adding on to profits. Profits are maximized. The height between those, difference between those two curves is maximized. Distance AB. When the slopes are just equal. When the slope of total revenue or marginal revenue equals the slope of total cost, or marginal cost. And after that point, the height difference starts constricting, because marginal cost, slope of total cost starts being greater than slope of total revenue or marginal revenue. The marginal curves tell us what output level to produce, what price to charge. How do we figure out profit? Just like in the competitive setting, we use the average curves. So once we've determined the right output level, seven, let's compare the difference between the average revenue curve, demand is the same as average revenue or price, and average cost. Let's take the average profit margin, multiply by quantity, we get the blue rectangle. That blue rectangle, is total profit or pi. So we use the marginal curves to figure out the right output. We use the average curves to figure out the average profit margin, and then ultimately the profit and how we can depict it graphically. Same rules we applied in perfect competition, except we just have the firm facing a different demand curve. Perfect competition, price taking, flat demand curve. Here you face the entire demand curve, you pick the right price quantity combination. We'll turn to some applications, and insights, further insights about monopoly in the next session.
