Lecture Notes-1 Name of Semester: - PowerPoint Presentation

1. Lecture Notes-1 Name of Semester: B.Com (Hons.) SEM-IV-BSubject: Microeconomics II and Indian economy (GE4.1)MODULE-I: Microeconomics II Chapter - MONOPOLYGoenka College of Commerce and Business AdministrationName of TeacherDR. RAJIB BHATTACHARYYAASSOCIATE PROFESSOR IN ECONOMICS (W.B.E.S.-A)

2. Topics for DiscussionChapter - MONOPOLYConcept of Monopoly. Sources of monopoly powerShort-run and Long-run equilibrium of a monopoly firm Price discrimination Social Cost of Monopoly (concept only).Suggested Readings• Pindyck and Rubinfeld, Micro Economics, Pearson• Gold & Ferguson, Micro Economic Theory• Mankiw.N.G., Principles of Microeconomics, Cengage• Samuelson & Nordhaus, Macroeconomics, McGraw Hill

3. MONOPOLYA monopoly is a market structure which has the following features:One seller and many buyers.No close substitute good for the product under consideration, exist.Entry to the market is barred. Sources of Monopoly:Ownership and control over raw material supplies.Existence of Patent Laws, Copy-rights, trade-marks (IPR).Natural Monopoly (where demand does not permit more than one firm to exist)Market Franchise (when the Govt. gives the firm the monopoly right).

4. Short run equilibrium under monopolyThis relationship provides a rule of thumb for pricing. The left-hand side,(P - MC)/P, is the markup over marginal cost as a percentage of price. The relationship says that this markup should equal minus the inverse of the elasticityof demand.

5. Measuring Monopoly PowerThis measure of monopoly power, introduced by economist Abba Lerner in 1934, is called the Lerner Index of MonopolyPower. It is the difference between price and marginal cost, divided by price. Mathematically: L = (P - MC)/PThe Lerner index always has a value between zero and one. For a perfectly competitive firm, P = MC, so that L = 0. The larger is L, the greater is the degree of monopoly power. This index of monopoly power can also be expressed in terms of the elasticityof demand facing the firm.L = (P - MC)/P = - 1/EdEd is now the elasticity of the firm’s demand curveELASTICITY OF DEMAND AND PRICE MARKUPThe markup (P − MC)/P is equal to minus the inverse of the elasticity of demand facing the firm. If the firm’s demand is elastic, as in (a), the markup is small and the firm has little monopoly power. The opposite is true if demand is relatively inelastic, as in (b).

6. In practice, the social cost of monopoly power is likely to exceed the deadweight loss in triangles B and C of Figure (adjacent) The reason is that the firm may engage in rent seeking: spending large amounts of money in socially unproductive efforts to acquire, maintain, or exercise its monopoly power. Rent seeking might involve lobbying activities (and perhaps campaign contributions) to obtain government regulations that make entry by potential competitors more difficult. Rent seeking activity could also involve advertising and legal efforts to avoid antitrust scrutiny.

7. Price DiscriminationPrice discrimination can take three broad forms, which we call first-, second-, and third-degree price discriminationFirst-Degree Price DiscriminationIdeally, a firm would like to charge a different price to each of its customers. If it could, it would charge each customer the maximum price that the customer is willing to pay for each unit bought. We call this maximum price the customer’sreservation price. The practice of charging each customer his or her reservation price is called perfect first-degree price discrimination.

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