2.11: Micro: Theory of the Firm: Reasons Why a Monopoly has NO Supply Curve: Pt. 2 of 2

Video explaining why a monopoly has no supply curve
Part 2: Review of supply: Perfect competition vs. Monopoly &
Two scenarios of changing PED for a monopoly & how there is no unique relationship between price & Qs
Scenario 1: A change in monopolist's PED results in a constant quantity where MR=MC, but a change in price
Scenario 2: A change in PED results in a constant price, but a change in quantity where MR=MC
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S ≠ MC for firms operating within imperfectly competitive market structures
Thus, the firm's MC curve should be labelled MC only
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Graph A: The Industry: Perfect Competition (time 0:40)
Upward sloping market supply curve = marginal costs
S1=MC1
A supply curve illustrates the positive relationship between price & Qs
Thus, as price rises, Qs increases, vice versa
Initial price P1 with Qs=Q1, Point A
Price rises to P2 (due to increase in market demand to D2), thus, Qs increases to Q2
Firms within the industry have the incentive to increase Qs as price rises since a higher price affords the firm to cover an increase in the marginal costs of production (movement along S1 from Point A to B)
Increased marginal costs are a result of the firm employing more resources to increase output
A higher price generates increased total revenue
TR1 = P1 x Q1
TR2 = P2 x Q2
TR2 is greater than TR1
In addition, a higher price generates increased producer surplus
Initial producer surplus, P1 = area a
Final producer surplus, P2 = areas a + b
Thus, the market supply of the industry illustrates a positive relationship between price & Qs
In addition, P = MC
At Point A, P1 = MC at Qs=Q1
At Point B, P2 = MC at Qs=Q2
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Graph B: The Firm: Perfect Competition (time 2:06)
Upward sloping supply curve = firm's marginal costs
S1=MC1
The Industry sets the price the Firm must accept (price taker)
P1 is perfectly elastic
P1=D1=MB1=AR1=MR1
Assuming profit max the firm produces at MR=MC at Q1
MR=MC explanation: • 2.11 (Micro) Rational ...
At P1, the firm increases Qs to Q1
At P1, MC=MR (profit max)
At P1, MC=MR=D1=MB1=AR1
As a result of a increase in market demand in the Industry, price rises to P2
The Firm accepts the higher price, & increases Qs to Q2 to max profit (MR=MC)
Thus, the firm's MC curve illustrates a positive relationship between price & Qs
In addition, we can see that P=MC & P=MR
At Point A, P1=MC at Qs=Q1
At Point B, P2=MC at Qs=Q2
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Graph C: Monopoly (time 3:15)
Upward sloping marginal cost curve (MC1) per law of diminishing marginal returns
MC=ATC at min ATC (min ATC=productive efficiency)
Demand curve: D1=Marginal Benefit (MB1)
D1=Average Revenue (AR1) curve
PED is less than 1 as the monopoly faces insignificant competition & provides a necessity or a unique good or service
Marginal Revenue (MR1) is less than AR1 as a result of the firm not price discriminating
Tutorial on AR greater than MR: • 2.11(Micro)Non-price d...
Assuming profit max the firm produces at MR=MC (Point C) at Qπmax1
MR=MC explanation: • 2.11(Micro) Rational p...
At Qπmax1, the firm sets price at P1=AR1 (Point A)
At Qπmax1, the firm generates abnormal profit as P1=AR is greater than C1=ATC (Point B)
At Qπmax1, the firm is productively inefficient as ATC (Point B) is greater than min ATC
At Qπmax1, the firm is allocatively inefficient as MB (Point A) is greater than MC (Point C)
At the monopolist's equilibrium of MR=MC at Qπmax1, P1 (MB) is greater than MC, thus reflecting the firm's market power & ability to determine price & ability to produce a quantity of output that is less than what is socially desirable (allocatively inefficient)
P1 is greater than MC & P1 is greater than MR
If the firm was operating in a more competitive market structure such as perfect competition, the firm would produce where S1=D1 (MC=MB) (time 3:40)
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Graph C: Monopoly: Scenario 1 (time 4:25)
Δ in PED for the monopolist results in a constant quantity where MR=MC, but a Δ in price
Assumption that monopolists has 90% market share, which is reduced to 80% as a result of rising, smaller competing firms
PED becomes more elastic
Δ in PED reflected from D1 to D2 & MR1 to MR2
Qπmax1 established at MC=MR2 (Point C)
Price falls to P2 (Point D)
Thus, a decrease in price (P1 to P2) leads to no Δ in quantity
Law of supply does not hold
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Graph C: Monopoly: Scenario 2 (time 7:59)
Δ in PED for the monopolist results in a constant price, but a Δ in quantity where MR=MC
Assumption that monopolists has 90% market share, which is reduced to 80% as a result of rising substitutes
PED becomes more elastic
Δ in PED reflected from D1 to D2 & MR1 to MR2
Price is constant at P1
Quantity increases from Qπmax1 to Qπmax2 established at MC=MR2
Thus, although price is held constant at P1, quantity provided by the firm increases
Law of supply does not hold

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[@graye_2843]

fantastic video and clearly explained. keep it up!

[@EZNOMICS]

Thank you so much!
Very happy to help in your studies : )
All the best,
Domenico

[@EZNOMICS]

* S ≠ MC for firms operating within imperfectly competitive market structures
* Thus, the firm's MC curve should be labelled MC only