ECN 102 Lecture Notes - Lecture 23: Perfect Competition, Profit Maximization, Market Power
Document Summary
A firm"s optimal output rule: a profit-maximizing firm produces the quantity of output mc = Demand curve of a monopolist: demand curve is the market demand curve, to sell more output it must lower the price; by reducing output it raise price. A monopolist is the sole supplier of its good, so its demand curve is simply the market demand curve (how much people want its products), which is downward sloping. Downward slope creates a wedge between the price of the good and the marginal revenue of the good. An increase in production by a monopolist has two opposing effects on revenue. Quantity effect: for every extra unit sold, total revenue increases by the price at which the unit is sold. Price effect: in order to sell the last unit, the monopolist must cut the market price on all units sold. Note: monopolist"s marginal revenue curve is always below the demand curve.
