Let us do some comparative statics .
And this comparative statics we would do for
the of course, monopoly as we are talking
about the monopolist . So, let us say what
happens if there is an increase in market
demand ? What it means is let us look at it
graphically and we are going to do these things
only graphically. So, very simple, let us
see that this is the demand function, this
is the marginal revenue function and let us
say that this is the marginal cost function.
Now what happens that, this demand curve shifts
outward.
So, of course, the marginal revenue curve
would also change and earlier we were having
this as the equilibrium quantity and this
as the equilibrium price. Now we see the intersection
between M C and new M R is taking place at
this point. What it means is? That the new
equilibrium point let us indicate by Q dash
that is equilibrium output and the new market
price is P dash. Very clearly that Q dash
is greater than Q star and P dash is greater
than P star.
So, what we saw that if market demand shifts
outward in that case the quantity supplied
by the monopolist in the market increases
as well the price at which it supplies its
output in the market also increases. But the
question is that, is this the case all the
time? Or this is because the way we have drawn
these graphs? So, let us look at another case
that here we have looked at the marginal cost
curve which is upward sloping.
Remember that many times this is the way we
have been drawing the marginal cost curve.
So, it is also possible that the marginal
cost curve can be downward sloping, this zone
if we take a look at and let us see what happens
in this particular case. So, continuing with
it let us say that here is the market demand,
here is the market revenue. This is demand,
this is market revenue and let us say that;
ok let me change slightly the color and let
us say that this is the marginal cost curve.
Now what happens if market demand shifts upward?
Let us say this is the shift. So, this is
going to be the new marginal revenue curve.
What is happening to the quantity supplied
? Quantity supplied still increases, but what
happens to the price? Earlier this was the
price, but now the price is slightly lower.
So, what we in the two cases that we saw that
Q star always increases as the market demand
shifts outward. We cannot say the same thing
about price. So, result about prices ambiguous,
we cannot say. Let us do some other comparative
statics and in this case we will talk about,
what happens if there is an increase in cost?
So, again let us draw the diagram.
Here is the market demand function, this is
D and this is marginal revenue and again here
is the cost. And let us say the cost shifts
upward, this is the marginal cost, this is
the marginal cost. So, as marginal cost shifts
upward, what happened to the quantity demanded?
The quantity demanded decreases ok.
What happens to the market price? This is
the market price earlier and the new market
price is . So, what we see that as marginal
cost increases or cost increases at all the
point then what happens ? Then the quantity
supplied in the market decreases, but the
price charged by the monopolist increases.
What happens? Just to be sure try one more
time . Oops, we have to draw the downward
sloping one.
So, let us see what happens to the equilibrium?
Earlier here is the equilibrium quantity and
this is the price . Now with shift this is
the equilibrium quantity and this is the price;
exactly same result that we get as in the
earlier case. So, we can say that as cost
increases, the quantity supplied by the monopolist
decreases and, but the price it charges in
the market increases.
Thank you.
