Sunday, November 2, 2014

Monopoly 1 - Characteristics, Downward Sloping Demand Curve, Marginal Revenue Curve, Elasticity

Monopoly 1 - Understand that Monopoly & Perfect Competition are the largest tested sections of the AP Micro. exam. The first question of the FRQ's has been PC or Monop. or a combination of the two for the last ten years, - know them!

Monopoly Video - mjmfoodie - 

Monopoly - a pure monopoly is a market structure that has only one firm selling a unique product, has price making power (price maker) and there are significant barriers to entry.

Monopoly characteristics being tested in the AP

2008 AP Microeconomics Exam

Answer - (C) Barriers to entry

But usually you will be tested using perfect competition and monopoly compared.

Example 1
Answer (B) The firm cannot affect the market price for its good.

Example 2

Answer (B) Increase - Decrease (This makes sense as monopolies can control the price of their products or the quantity but not both. Logically they would want a higher price with less quantity.)

Monopoly and Regulation - Video - Mjmfoodie

So how do we draw the revenue curves for a monopoly.

Demand Curve & Marginal Revenue Curve 
Notice the downward sloping demand curve (monopolists must lower prices to sell more) and the marginal return curve. Because the monopolist must lower its price to sell more units , its marginal revenue of a particular unit will always be lower than the price that unit sells for. (except at an output of 1).

Notice the MR curve breaks through the bottom axis,,, marginal revenue can be negative. When marginal revenue becomes negative is when Total Revenue begins to decrease.

Marginal revenue curve, Demand, TR and Elasticity

Graph above,, notice that as marginal revenue becomes negative, total revenue starts to decrease. Also notice,  that a monopolist with a price lower than R (on the above graph) would be producing in the lower section of its demand curve (the inelastic section) and that leads to decreasing profits,,, monopolists will not choose voluntarily to produce in this area. Monopolists choose to produce in the elastic sections of their demand curve...

2005 AP Microeconomics Exam
Answer (C) Demand for its product is price inelastic.

2008 AP Microeconomics Exam
Answer (B) elastic region of its demand curve

Welker Video - Monopoly

Monopoly, Profit max, PED (elasticity) - welker video

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