Answered! Molly’s Monopoly Assume the coffee shop Molly wishes to purchase is a monopoly. Her costs are still the same, but now the entire…

Profit maximization techniques for monopoly :

Well! if you see In a monopolistic scenario or market, there is only one firm that produces a product. There is absolute product differentiation because there is no substitute. One characteristic of a monopolist is Profit Maximizer. Since there is no competition in a monopolistic market, a monopolist can set the price level and the quantity demanded. The level of output that maximizes monopoly output is calculated by equating its marginal cost to its marginal revenue.

The marginal cost of production is the change in the total cost that arises when there is a change in the quantity produced, in calculation terms, if the total cost function is given, the marginal cost of a firm is calculated by taking the first derivative, with respect to the quantity.

The marginal revenue is the change in the total revenue that arises when there is a change in the quantity produced. The total revenue is found by multiplying the price of one unit sold by the total quantity sold. For example if the price of a good is $10 and a monopolist produces 100 units of a product per day, its total revenue is $ 1000. The marginal revenue of producing 101 units per day is $10. However the total revenue per day increases from $1000 to $1010. The marginal revenue of a firm is also calculated by taking the first derivative of the total revenue equation.

In a monopolistic market, a firm maximizes its total profit by equating marginal cost to marginal revenue and solving for the price of one product and the quantity it must produce.

For instance, suppose a monolpolist total cost function is P = 10Q + Q^2, where Q is the quantity . Its demand function is P = 25- Q, and the total revenue is found my multiplying P by Q, Where P is the price and Q is the quantity . Therefore the total revenue function is : TR = 25Q-Q^2. The marginal cost function is MC = 10+2Q . The marginal revenue is MR = 25-2Q. The monopolist profit is found by subtracting total cost from its total revenue. In terms of calculus, the profit is maximized by taking the derivative of this function π = TR-TC, and equating it to zero.

Therefore the quantity supplied that maximizes the monopolist profit found by equating MC to MR : 10+2Q = 30-2Q. The quantity it must produce to satisfy the equality above is five . This quantity must be plugged back into the demand function to find the price for one product. To maximize its profit the firm must sell one unit of the product for $20 . The total profit of this firm is 25, or TR – TC = 100-75

Market power :

Market power is the ability of a firm to profitability raise the market price of goods or service over marginal cost.In perfectly competitive markets,markets participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as price makers or price setters while those without are sometimes called price takers. Significant market power occurs when prices exceed marginal cost and long run average cost so the firm makes economic profits.

A firm with market power has the ability to individually affect either the total quantity of the prevailing price in the market. Price makers face a downward-sloping demand curve, such that price increases lead to a lower quanity demanded. The decrease in supply as a result of the exercise of market power creates an economic deadweight loss which is often viewed as socially undersirable . As a result many countries have anti-trust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compet divestiture.

Market power normally provides the firms the ability to engage in unilateral anti-competitive behavior. Some of the behaviours that firms with market power are accused of engaging in include predatory pricing, product tying and creation of overcapacity or others barriers to entry. If no individual participant in the market has significant market power then anti-competitive behavior can take place only through collusion, or the exercise of a group of the participants collective market power.

Market failure due to pricing :

Market failure is a situation in which the allocation of goods and services is not efficient. That is there exists another conceivable outcome where and individual may be made better off without making someone else worse off. Market failures can be viewed as scenarios where individual pursuit of pure self interest leads to results that are not efficient- that can be improved upon from the societal point of view. Basically market failures are often associated with time – inconsistent preferences, information asymmetries, non-competitive markets, principal-agent problems, externalities or public goods thus existence of market failure is often the reason that self-regulatory organizations, governments of supra-national institutions intervene in a particular market. Economist, especially microeconomists, are often concerned with the causes of market failure and possible means of correction. Such analysis plays an important role in many types of public policy decisions and studies. However govenment policy intervention such as taxes, subsidies,bailouts, wage and price controls and regulations(including poorly implemented attempts to correct market failure) may also lead to an inefficient allocation of resources, sometimes called government failures. On the one hand the undeniable costs to society caused by market failure, and on the other hand, the potential that attempts to mitigate these costs could lead to even greater cost to government failure exists the outcome is not Pareto Efficient. Most mainstream economists believe that there are circumstances (like building codes or endangered species) in which possible for government or other organization to improve the ineffeicient market outcome.

Advertising :

Advertising is kind of means of communication with the users of a product or service. Advertisement are messages paid for by those who send them and are intended to inform of influence people who receive them.

Advertising is always present, though people may not be aware of it. In today world advertising uses every possible media to get its message through. It does this through television, print (newspapers, magazines,journals,etc) radio, press, internet, direct selling, hoardings, mailers, contests,sponsorships, posters,clothes,colours,sounds,visuals and even people (endorsements).

If we see the objectives of all business are to make profits and merchandising concern can do that by increasing its sales remunerative prices. This is possible, if the product is widely polished to the audience the final consumer, channel members and industrial users and through convincing arguments it is persuaded to buy it . Publicity makes a thing or idea known to people. It is a general term indicating efforts at mass appeal. As personal simulation of demand for a product service or business unit by planting commercially significant news about in a published medium or obtaining favourable presentation of it upon video television or stage that is not paid for the sponsor.

On the other hand if we see advertising denotes a specific attempt to popularize a specific product or service at a certain cost. It is a method of publicity. It always intentional openly sponsored by the sponsor and involves certain cost and hence is paid for. It is a common form of non-personal communication about an organisation and or its products idea sercive etc that is transmitted to a target audiences through a mass medium

Advertising is one kind of element that businesses of every size need to manage. In addition to the expense, you don’t want to place messages in the public eye that dont resonate with prospective customers or that can be misconstrued. Prepare a few different ads and test them before airing or printing, small businesses can do it simply by intercepting people in public places, like shopping malls . This way you can adjust any negative perceptions.

Digitel or interactive internet advertising poses special measurement challenges that the ad and internet industry are attempting to refine. Industry groups such as the American Association of Advertising agencies and internet Advertising Bureau have developed standards for online companies to follow so that businesses can calculate advertising effectiveness with consistency across various sites. Impression measurements include clicks and unique visitors. Before purchasing digital advertising, ask each company if it follows these industry standards, so that your internet advertising measurements are consitent