lectures in microeconomics-charles w. upton managing with multiple plants
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![Page 1: Lectures in Microeconomics-Charles W. Upton Managing with Multiple Plants](https://reader033.vdocuments.us/reader033/viewer/2022051401/56649d4b5503460f94a28941/html5/thumbnails/1.jpg)
Lectures in Microeconomics-Charles W. Upton
Managing with Multiple PlantsMC
AC
cmin
qmin Nqmin
LRMC
SRMC
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Managing with Multiple Plants
Handling Multiple Plants
MC
AC
cmin
qmin
Suppose we have many plants with
these MC and AC curves.
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Managing with Multiple Plants
The LRMC Curve
MC
AC
cmin
qmin Nqmin
LRMC
SRMC
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Managing with Multiple Plants
The LRMC Curve
MC
AC
cmin
qmin Nqmin
LRMC
SRMCLRMC is simply cmin.
SRMC is N x MC of existing plants
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Managing with Multiple Plants
A Change in Demand
cmin
Q*
P*
DMR
LRMC
The initial situation
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Managing with Multiple Plants
Demand increases. How
does the monopolist respond?
Demand Increases
cmin
Q*
P*
DMR
LRMC
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Managing with Multiple Plants
Demand increases. How
does the monopolist respond?
Demand Increases
cmin
Q*
P*
DMR
LRMC
SRMC
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Managing with Multiple Plants
Intersection of MC and MR
changes
New Equilibrium
cmin
Q*
P*
DMR
LRMC
SRMC
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Managing with Multiple Plants
Price and Output Rise
New Equilibrium
cmin
Q*
P*
DMR
LRMC
SRMC
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Managing with Multiple Plants
New Plants!
Expansion
cmin
Q*
P*
DMR
LRMC
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Managing with Multiple Plants
New MR=MC
Expansion
cmin
Q*
P*
DMR
LRMC
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Managing with Multiple Plants
Lower Price, More Output
Back to LRMC
cmin
Q*
P*
DMR
LRMC
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Managing with Multiple Plants
Summary
cmin
Q*
P*
DMR
LRMC
Summary: increase in demand leads to
higher price and output, as
monopolist moves along SRMC. (Red
to Green)
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Managing with Multiple Plants
Summary
cmin
Q*
P*
DMR
LRMC
Monopolist builds new plants,
returning to LRMC curve. (Green to Purple). As this
happens, price falls and output rises.
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Managing with Multiple Plants
Change in Output
cmin
Q*
P*
DMR
LRMC
Output>Output>Output
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Managing with Multiple Plants
Change in Price
cmin
Q*
P*
DMR
LRMC
Output>Output>Output
Price>PricePrice> Price
Price> Price?
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Managing with Multiple Plants
But Which Way?
cmin
Q*
P*
DMR
LRMC
Output>Output>Output
Price>PricePrice> Price
Price> Price?
Maybe, maybe not. Depends on impact on .
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Managing with Multiple Plants
Introducing New Technologies
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Managing with Multiple Plants
The Initial Situation
MCAC
cmin
qmin
Initially, all plants are as shown. cmin is
LRMC.
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Managing with Multiple Plants
The Initial Situation
MCAC
cmin
qmin
Initially, all plants are as shown. cmin is
LRMC.If total output = Q, the monopoly
operates N = Q/qmin
plants
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Managing with Multiple Plants
A New Technology
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
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Managing with Multiple Plants
A New Technology
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Lower MC!
Lower AC!
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Managing with Multiple Plants
New LRMC
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
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Managing with Multiple Plants
Operating Level for Old Plants
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
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Managing with Multiple Plants
Operating Level for Old Plants
MCAC
cmin
qmin
MC
AC
q*min
c*min
q**
Should old plants be abandoned? Not as
long as c*min is above the minimum
of AVC
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Managing with Multiple Plants
The Old Equilibrium
cmin
Q*
p*
DMR
LRMC
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Managing with Multiple Plants
New LRMC
cmin
Q*
p*
DMR
LRMC
c*min LRMC
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Managing with Multiple Plants
The New Equilibrium
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
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Managing with Multiple Plants
Revenue Gain
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
Lose the Grey, gain the Yellow
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Managing with Multiple Plants
Revenue Gain-2
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
The Net
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Managing with Multiple Plants
Profit Gain
cmin
Q*
p*
DMR
LRMC
c*min LRMC
p**
Q**
Cost Cutting Gains
Revenue Gains
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Managing with Multiple Plants
End
©2003 Charles W. Upton
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Managing with Multiple Plants
End
©2003 Charles W. Upton