Dominance Equilibrium: Applying the Marginal Choice Laws
A strong wouldn’t make a supplementary device off output with bad limited money. And, providing the creation of a supplementary unit has many costs, a company wouldn’t produce the extra equipment when it keeps no marginal cash. Because the a dominance business will normally perform where marginal cash is self-confident, we see again that it will work with the brand new flexible variety of its request curve.
Profit-promoting choices is in accordance with the limited choice signal: Additional units a good will be put for as long as the new limited cash away from an additional tool exceeds the brand new marginal cost. New maximizing services happen in which marginal revenue equals limited prices. As ever, providers attempt to maximize economic finances, and you may prices are counted on economic feeling of possibility pricing.
Shape ten.5 “The Monopoly Service” shows a request contour and you will a related marginal revenue bend up against a dominance agency. The new limited prices contour is like those we derived before; they falls along side list of productivity the spot where the business event expanding limited production, up coming increases due to the fact enterprise feel diminishing marginal output.
The monopoly firm maximizes profit by producing an output Qm at point G, where the marginal revenue and marginal cost curves intersect. It sells this output at price Pm.
To determine the profit-maximizing output, we note the quantity at which the firm’s marginal revenue and marginal cost curves intersect (Qm in Figure 10.5 “The Monopoly Solution”). We read up from Qm to the demand curve to find the price Pm at which the firm can sell Qm units per period. The profit-maximizing price and output are given by point E on the demand curve.
A monopoly firm’s profit per unit is the difference between price and average total cost. Total profit equals profit per unit times the quantity produced. mPmEF.
Once we have determined the monopoly firm’s price and output, we can determine its economic profit by adding the firm’s average total cost curve to the graph showing demand, marginal revenue, and marginal cost, as shown in Figure 10.6 “Computing Monopoly Profit”. The average total cost (ATC) at an output of Qm units is ATCm. The firm’s profit per unit is thus Pm – ATCm. Total profit is found by multiplying the firm’s output, Qm, by profit per unit, so total profit equals Qm(Pm – ATCm)-the area of the shaded rectangle in Figure 10.6 “Computing Monopoly Profit”.
As Figure 10.5 “The Monopoly Solution” shows, once the monopoly firm decides on the number of units of output that will maximize profit, the price at which it can sell that many units is found by “reading off” the demand curve the price associated with that many units. If it tries to sell Qm units of output for more than Pm, some of its output will go unsold. The monopoly firm can set its price, but is restricted to price and output combinations that lie on its demand curve. It cannot just “charge whatever it wants.” And if it charges “all the market will bear,” it will sell either 0 or, at most, 1 unit of output.