The Firm’s Supply Decision-Monopoly

To earn as large a profit as possible, a monopolist will choose the output that makes its marginal cost equal to its marginal revenue..

If the monopolist were producing the output q₁, its marginal revenue would exceed its marginal cost. If the monopolist increased the output from q₁, its revenue would increase more than its cost, meaning that its profit would increase. The monopolist will have an incentive to increase output as long as marginal cost, the profit will be a maximum.. Read the rest of this entry »

The Degree of Market Power

The price elasticity of demand tells us how sensitive the quantity demanded is to price. If the price elasticity of demand is 1, a1 per cent increase in price will result in a 1 per cent decrease in the quantity demanded.

When the price elasticity of demand is large, the quantity demanded is very sensitive to price. A small percentage reduction in price causes a large increase in the quantity demanded. If the price elasticity of demand were 5, a reduction in price of only 1/5^th of 1 per cent would be needed to bring about a 1 per cent increase in the quantity demanded. Read the rest of this entry »

Consumers’ Surplus

Monopoly is undesirable because a monopolist will restrict output and charge more for the product than the opportunity cost of the resources used. To measure the size of the inefficiency due to monopoly, we need to measure the social value of a given quantity of a product. This brings us to the concept of consumers’ surplus.

In the preceding discussion of the difference between marginal revenue and marginal cost, we use the fact that all consumers in the market pay the same price for a unit of output. In a market situation, consumers are usually Read the rest of this entry »

Introduction

The subject matter of industrial economics is the behavior of firms in industries. Industrial economists study the policies of firms toward rivals and toward customers (which includes at least prices, advertising, and research and development). Industrial economists study firms in industries that are competitive, and they study firms in industries that are less than competitive. But this is nothing more or less than the subject matter of microeconomics-specifically, the theory of the firm. At a fundamental level, there is no difference between industrial economics and what is sometimes called price theory. Read the rest of this entry »