Micro Chapter 22 Presentation 2
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Transcript Micro Chapter 22 Presentation 2
Monopoly Demand Curve
The industry and the firm are the same
The demand curve is downsloping
Supply Curve
There is no supply curve for a pure
monopoly
It is possible for different demand
conditions to bring about different prices
for the same output
Marginal Revenue
MR is less than P for a monopoly except
for the 1st unit
They can increase sales only by
charging a lower price
Price and Marginal Revenue
Marginal Revenue is Less Than Price
• A Monopolist is
Selling 3 Units at
$142
• To Sell More (4),
Price Must Be
Lowered to $132
• All Customers
Must Pay the Same
Price
• TR Increases $132
Minus $30 (3x$10)
$142
132
122
112
Loss = $30
D
102
Gain = $132
92
82
0
1
2
3
4
5
6
Price Maker
The monopolist sets the price of its
product by controlling the supply
They will set prices in the elastic range
of demand (TR test---as price declines,
TR increases)
Profit Maximization
MR = MC rule still applies
Draw a vertical line up from where MR =
MC to the D curve to find P
Profit Maximization
Price, Costs, and Revenue
$200
175
MC
150
Pm=$122
125
100
75
Economic
Profit
ATC
A=$94
D
MR=MC
50
25
0
MR
1
2
3
4
5
6
Quantity
7
8
9
10
Price, Costs, and Revenue
Loss Minimization By A Pure Monopolist
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
Qm
Quantity
Economic Effects of
Monopoly
Price, Output, and Efficiency
Pure
Monopoly
Purely
Competitive
Market
S=MC
MC
Pm
P=MC=
Minimum
ATC
Pc
b
c
Pc
a
D
D
MR
Qc
Qm
Qc
Pure Competition is Efficient
Monopoly P is >MC
And Is Inefficient- make too little at too high a cost
Misconceptions About
Monopolies
1. Not highest price- seek maximum
profit, not price. Some high prices
would reduce sales and total revenue
2. Seek maximum total profit not unit
profit
3. Possibility of loss- monopolies are not
immune to escalating resource costs or
changing tastes
X inefficiency
When a firm produces output at a level
higher than the lowest possible cost of
producing
Reasons:
1. Poorly motivated workers
Bad management- looking to expand
their power, nepotism etc
***competitive firms avoid x inefficiency
because of competition
Rent-Seeking Behavior
Any activity designed to transfer income
or wealth to a particular firm or resource
supplier at someone else’s or even
society’s expense- increases costs
without making a better product
Problems with Monopolies
1. Charge higher than competitive prices
2. Stifle innovation
3. Engage in rent-seeking behavior
4. X inefficiency
Government Actions
1. if the monopoly is obtained through
anti-competitive means, the government
can apply anti-trust laws
2. Regulate prices
3. Can ignore it if the monopoly appears
short-lived
Price Discrimination
The practice of selling a specific product
at more than one price when the price
differences are not justified by cost
differences
3 Types of Price Discrimination
1. Charging each customer in a single
market the maximum price he is willing
to pay
2. Charging each customer one price for
the first set of units purchased and a
lower price for the subsequent units
purchased
3. Charging some customers one price
and other customers another price
Conditions for Price
Discrimination
1. Monopoly Power
2. Market segregation- separate buyers
into different classes
3. No resale
Examples of Price Discrimination
1. Golf and movie theatres- different age
and time costs (seniors, weekend)more expensive on the weekend
2. Airlines charge higher rates on big
business travel days
Figure 8a: Price
Discrimination
(a)
Dollars per
Ticket
MC
$120
E
ATC
80
MR
30
D
Number of Round-trip Tickets
Figure 8b: Price
Discrimination
(b)
Dollars per
Ticket
Additional profit from
price discrimination
MC
$160
120
MR
10
30
D
Number of Round-trip Tickets
Figure 8c: Price
Discrimination
(c)
Dollars per
Ticket
MC
$120
100
G
Additional profit from
price discrimination
F
H
MR
30
40
D
Number of Round-trip Tickets
Using the Theory: Price
Discrimination at Colleges and
Universities
Most colleges and universities give some kind of
financial aid to a large proportion of their students
Financial aid has been used as an effective
method of price discrimination
Designed to increase revenue of the college
Colleges have long been in an especially good
position to benefit from price discrimination,
because they satisfy all three requirements
Face downward-sloping demand curves
Able to identify consumers willing to pay more
Able to prevent low-price customers from reselling to high-
price customers
Socially Optimal Price
P = MC
Regulated price set as a price ceiling
(maximum cost)
Fair Return Cost
P = ATC
At times the socially acceptable cost
causes the firm to “lose”
Governments can subsidize the
difference or allow the firm to charge
enough to have “fair returns”
Regulated Monopoly
Perfectly Discriminating
Monopoly
Unregulated
Perfectly Discriminating