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1、Chapter 8 Price-searching8.1 Introduction-The condition in a price-takers market are rarely satisfied in reality.-If one or more of these conditions do not hold, the result is a different market structure 一 a price-searcher market (competition)Basic Assumptions / Conditions1. Number of sellerIt is n
2、ot necessarily large. It may be a few or even one only.2. productThe products may differ in physical features, quality, salesmans service, etc.3. infonnationInformation is acquired at a cost.Implications from the above conditions :(a) Demand curve facing a price-searcher is-sloping with respect topr
3、ice. A slightlyprice does not attract all consumers away fromother sellers and vice versa.(b) MR isthan PIf the firm offers additional units to customers, the result is aprice. The price falls not just on the additional units offered, but also on all units formerly offered at a higher price.8.2 Type
4、s of Price-searchers1. Closed-market price-searchers / monopolist-Onlyseller of good-Faces nofrom close substitutes-Monopolist comes from entry barriers such as :(a) Public franchises 一 E.g. Kowloon Motor Bus Co. Ltd.(b)2. Open-market price-searchers2 types :(a) competition-Large number of firms sel
5、ling similar butproduct-Power of setting price is limited since the product sold has many very close substitutes competition is the main feature, e.g.improving product quality, sales services, advertising.(b) Oligopoly-Number of sellers is9 an action by one will induce othersto react one seller has
6、an effect on the prices of other sellers not merely on his own prices -Firms are unwilling to lower P because others may quickly match it and market share of each seller will remain the same firms will not raise P as this will lose their market share to other finns +8.3 Wealth-maximizing Output of a
7、 Monopoly1. Maximizing condition(a) In SR, AR; in LR,(b) e(c) MC curve cuts MR curve from2. Given the demand curve and MC curve, the wealth-maximizingand theare determined.PazMCD1=MUV1=ARIQMR1Given the cost situation and demand curve above, one will produce atand the price is.Since MRP, the point wh
8、ere MR=MC shows only the relationshipbetweenand, not P and Qs nocurve in amonopoly model.Given the same cost situation but the demand curve is now D2, one will stillproduce albut the price iswhich isthan that in theabove case !LR.8,5 Monopoly Rent3 monopoly rent exists even in the- Monopoly rent is
9、income derived from.- Monopoly will continue lo produce even if monopoly rent doesnt exist. Why?- Monopoly rent is not profit. Profit isincrease in incomebut rent isincome earned by the monopolist.- Monopoly rent is part of. It is because the monopolist hasforgone the option of.- If the cost of owni
10、ng the monopoly right is added into AC, the AC curvewill shift. (Show this on the graph above.)8.6 Implications of Taxes on Monopoly1. Lump-sum tax-It will not affect theof production Qs and P remain.-It only reduces theof the monopolist. Provided that the tax isrent, production will continue.2. Out
11、put taxItthe MC Qsand P3. Profits taxMonopoly & Efficiency1. ProductionIn order to maximum wealth, a monopolist will try tocost.Thus, production efficiency is attained.2. ConsumptionMaximizing consumer will consume at where =. If uniform priceis charged consumption efficiency / inefficiency.3. Resou
12、rces allocationAs a monopolist produces at where MC = MR and MRP(MUV)今 MCMUV 今 allocative efficiency / inefficiency.In this case, consumers arc willing to pay a price (=MUV)than itsproduction cost for an extra unit (=MC) it is possible to make someone better off without making someone else worse off
13、 !In the graph above, a maximizing monopolist will produce at. At thatmarginal unit, MUV is; MC is. (MUVMC)As explained, it is possible to produce and trade more without making someone else worse off till theunit is reached. If instead, onlyis produced,there is deadweight loss/ inefficiency which is
14、 equal to area.Q. Is it really an inefficiency ?1. True or false.(a) Since monopolist faces no competition from close substitutes and he is theonly one seller in the market, he faces no competition at all.(b) There is no supply curve in a monopoly model. This implies that monopolistwill make no prod
15、uction at all.2. A monopolist will not produce at an output range where its demand is inelastic. Why ?3. Make a survey on 2-3 products with varying degrees of product differentiation.(c) tabulate the prices for each productlist the product characteristics preferred by you.(d) point out the maximum increase in price you can tolerate *(Aim: Discover the importance of product differentiation in affecting the market power of a monopolistic competitive firm.)*THE END*
