Académique Documents
Professionnel Documents
Culture Documents
24
DMR= –2
Dp= –1
DQ= 1
DQ= 1
12
0 12 24
MR = 24 – 2Q Q, Units per day
Price Elasticity of DD (ep)
• MR at any point depends on the demand curves height (price) & shape
• The shape of the demand curve is at a particular quantity is described by
the price-elasticity of demand
• When calculated, ep has a negative sign (D price & D Qd are in opposite directions)
• At a given quantity, MR equals price times a term involving the elasticity of demand:
• Eq 11.4 shows that the more elastic is demand, the closer MR is to the price level
• When Q=0, the demand curve is perfectly elastic & MR=P y-axis intercept
MR & (ep) See Fig. 11.2 (p372, 7th ed.) (p379, 6th ed.)
Figure 11.2 Elasticity of Demand and Total,
Average, and Marginal Revenue
p, $ per unit
24 Perfectly elastic ε = -
•If the monopolist chooses P, then it has to accept the Q dictated by the demand curve
•If the monopolist chooses its Q, it must accept the price determined by the demand
curve
•Since the monopolist wants to maximise profit, it chooses the same profit-max solution
whether it chooses price or output
AR = TR TR = AR x Q
Q
AC = TC TC = AC x Q
Q
• MR = MC at Q = 6
• P>MC
•Monopolist will only shutdown if the optimal monopoly price is below average cost if
the price is less than AVC in the SR
•Does firm make economic profit (AR>ATC), normal profit (AR=ATC) or economic loss
(AR<ATC)?
•AT Q = 6, ATC = $8
• We derive the relationship between market power & the elasticity of demand
at the profit-max Q using eq. 11.4 & the firms profit-max condition
• Eq. 11.8 says that the ratio of price to MC depends only on the elasticity of
demand at the profit-max Q
• Table 11.2 shows how the ratio of P/MC changes with the elasticity of
demand
Table 11.2 Elasticity of Demand, Price, and Marginal Cost
• Table 11.2 shows that not all monopolies can set high prices
• A monopolist which faces a perfectly elastic (horizontal) demand curve sets its
P = MC, like a firm in perfect-competition
• The more elastic is the demand curve, the less a monopolist can raise its price
without losing sales
• Ceteris paribus, the more substitutes which are available for a good, the more
elastic is the demand curve
The Lerner Index
•Another way of showing how the elasticity of demand affects a monopoly’s P relative to
MC Lerner index (price markup)
•We can express the Lerner index in terms of elasticity if the firm is maximising profit by
rearranging eqn 11.8:
L.I. ranges from 0 to 1 for profit max. firm -as DD becomes less elastic, L.I. increases
• The more consumers want a good the more they are willing to pay for it –
the less elastic is the demand curve
• The demand curve a firm faces becomes more elastic:
- the greater are the substitutes for a good;
- the more firms there are selling a good; and
- the closer firms which sell the good are to the firm.