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Comparative statics for demand and supply

1,582 bytes added, 00:43, 10 February 2014
Monopolistic markets in the short run
The optimal (price, quantity) pair the firm chooses is determined by the point of crossing of the marginal cost curve of the firm (based on the firm's production technology) and the marginal revenue curve (obtained from the market demand curve as the derivative <math>d(PQ)/dQ</math> treating <math>P</math> as the inverse demand function of <math>Q</math>, with graph the [[market demand curve]]), with <math>MR - MC</math> switching sign from positive to negative. Unlike the case of competitive markets, where the slopes of the demand and supply curve are clearly understood, the picture here is unclear: the marginal revenue curve may be upward-sloping, downward-sloping, or mixed, depending on how the [[price-elasticity of demand]] compares with 1 (in magnitude).
Very little can be said in general about the effect of expansions of contractions of the demand curve on the price and quantity supplied, because what matters are the ''shape'' changes. The only thing that can be said in general is that ''both'' price and quantity cannot decrease due to an expansion of the demand curve.
(need {| class="sortable" border="1"! Price effect of outward expansion!! Quantity effect of outward expansion !! Scenario type|-| increases || increases || The increased demand makes it desirable to serve a larger market, but not enough to lower the price: expanding the market to the point that it might necessitate lowering the price is not worthwhile because the population gained that way is not large enough to insert plausiblecompensate for the lower producer surplus per sale. This scenario qualitatively resembles competitive markets.|-sounding examples | increases || decreases || Demand increases a lot among the segment with the highest [[reservation price]], so that the optimal choice is to raise prices to capture a larger share of the social surplus from selling to illustrate how these customers, even at the cost of losing out other segments.|-| decreases || increases || There is increased demand from a share of the population with low [[reservation price]], but it could go many waysis sufficiently large that it makes sense for the monopolist to lower the price to be able to sell to that market, even though that reduces the producer surplus from the existing market.|-| decreases || decreases || This cannot happen. To see this, note that the new (price, quantity) pair is on the new (expanded) demand curve, whereas the old (price, quantity) pair is on the old demand curve, and ''no'' point on the new demand curve has both price and quantity lower than any point on the old demand curve. (This is a direct consequence of what "expansion" of the demand curve means).|}
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