Transcript Introduction to Monopolies

Unit 4:
Imperfect
Competition
1
What do you already know about
monopolies?
True or False?
1.
2.
3.
4.
5.
All monopolies make a profit.
Monopolies are usually efficient.
All monopolies are bad for the economy.
All monopolies are illegal.
Monopolies charge the highest price
possible
6. The government never prevents
monopolies from forming.
2
Memorizing vs. Learning
12-35711131-71923
Try memorizing the above number
How effective is memorizing it?
The point: If you try to MEMORIZE
all the graphs of economics you will
forget them. You must LEARN them!
Monopoly
4
Characteristics of
Monopolies
5
5 Characteristics of a Monopoly
1. Single Seller
• One Firm controls the vast majority of a
market
• The Firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
The firm can manipulate the price by changing
the quantity it produces (ie. shifting the supply
curve to the left).
6
Ex: California electric companies
5 Characteristics of a Monopoly
4. High Barriers to Entry
• New firms CANNOT enter market
• No immediate competitors
• Firm can make profit in the long-run
5. Some “Nonprice” Competition
• Despite having no close competitors,
monopolies still advertise their products
in an effort to increase demand.
7
Examples of
Monopolies
8
9
Four Origins of Monopolies
1. Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, San Diego
Chargers, Cable TV, Qualcomm Hot Dogs…
-Location or control of resources limits competition and leads
to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army, Pharmaceutical
drugs, rubix cubes…
-Government allows monopoly for public benefits or to
stimulate innovation.
-The government issues patents to protect inventors and
forbids others from using their invention. (They last 20
years)
10
Four Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Band-Aide…
-Patents and widespread availability of certain products lead to
only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies (SDGE)
• If there were three competing electric companies they would
have higher costs.
• Having only one electric company keeps prices low
-Economies of scale make it impractical to have smaller firms.
Natural Monopoly- It is NATURAL for only one firm to produce
because they can produce at the lowest cost.
11
Drawing
Monopolies
12
Good news…
1.Only one graph because the
firm IS the industry.
2.The cost curves are the same
3.The MR= MC rule still applies
4.Shut down rule still applies
13
The Main Difference
• Monopolies (and all Imperfectly
competitive firms) have downward
sloping demand curve.
• Which means, to sell more a firm must
lower its price.
• This changes MR…
THE MARGINAL REVENUE
DOESN’T EQUAL THE PRICE!
14
Combine the Demand of an industry
with the costs of a firm.
MC
Price
ATC
What about MR?
D
Quantity
15
Combine the Demand of an industry
with the costs of a firm.
MC
Price
ATC
D
MR
Quantity
16
Why is MR less than
Demand?
P
Qd
$11
0
TR MR
0
-
17
Why is MR less than
Demand?
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
18
Why is MR less than
Demand?
$10
$9
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
18
10
8
$9
19
Why is MR less than
Demand?
$10
$9
$9
$8
$8
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
18
24
10
8
6
$8
20
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
18
24
28
10
8
6
4
$7
21
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
P
Qd
$11
$10
$9
$8
$7
$6
0
1
2
3
4
5
TR MR
0
10
18
24
28
30
10
8
6
4
2
$6
22
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
0
1
2
3
4
5
6
TR MR
0
10
18
24
28
30
30
10
8
6
4
2
0
$5
23
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
24
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
25
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
MR
$8 IS LESS THAN
$7 $7 PRICE
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
26
Why is MR below Demand?
P
$10
9
8
7
6
5
4
3
2
D
1
1
2
3
4
5
6
7
Q
MR
27
Why is MR below Demand?
At price $10, TR = $10
When price falls to $9, MR =$8
What happens to MR when
price falls to $8?
P
$10
9
8
7
6
5
4
3
2
D
1
1
2
3
4
5
6
7
Q
MR
28
Why is MR below Demand?
At price $10, TR = $10
When price falls to $9, MR =$8
What happens to MR when
price falls to $8?
P
$10
9
8
7
6
5
4
3
2
MR CURVE IS LESS
THAN
DEMAND CURVE!!!
1
1
2
3
4
5
6
7
D
Q
MR
29
Calculating
Marginal Revenue
30
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
10
Price
$16
15
14
13
12
11
10
9
8
7
6
TR
MR
31
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
10
Price
$16
15
14
13
12
11
10
9
8
7
6
TR
0
15
28
39
48
55
60
63
64
63
60
MR
32
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
10
Price
$16
15
14
13
12
11
10
9
8
7
6
TR
0
15
28
39
48
55
60
63
64
63
60
MR
15
13
11
9
7
5
3
1
-1
-3
33
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
Price
$16
15
14
13
12
11
10
9
8
7
TR
0
15
28
39
48
55
60
63
64
63
MR
15
13
11
9
7
5
3
1
-1
10
6
60
-3
34
Plot the Demand, Marginal Revenue, and
Total Revenue Curves
P
$15
10
5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
TR
$64
40
20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
35
Demand and Marginal Revenue Curves
What happens to TR when MR hits zero?
P
$15
10
5
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
TR
$64
40
20
MR
Total Revenue is
at it’s peak when
MR hits zero
TR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
36
Elastic vs. Inelastic
Range of Demand Curve
37
Elastic and Inelastic Range
P
Total Revenue Test
If price falls and TR
increases then
demand is elastic.
Elastic
Inelastic
$15
10
5
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Total Revenue Test
If price falls and
TR falls then
demand is inelastic.
$64
40
20
1 2 3 4 5 6 7 8
Q
A monopoly
MR
will only
produce in
the elastic
range
TR
Q
38
9 10 11 12 13 14 15 16 17 18
Maximizing
Profit
39
What output should this monopoly produce?
MR = MC
How much is the TR, TC and Profit or Loss?
P
MC
$9
ATC
8
7 Profit =$5
6
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
40
Conclusion: A monopolist produces where MR=MC,
buts charges the price consumer are willing to pay
identified by the demand curve.
P
MC
$9
ATC
8
7
6
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
41
What if cost are higher?
How much is the TR, TC, and Profit or Loss?
MC
P
ATC
$10
9
8
AVC
7
6
5
D
4
TR= $90
TC= $100
Loss=$10
MR
3
6 7 8 9 10
Q
42
Identify and Calculate:
TR= $70
TC= $56
Profit/Loss= $14
Profit/Loss per Unit= $2
P
MC
ATC
$10
9
8
7
6
D
MR
5
4
1 2 3 4 5 6 7 8
9 10
Q
43
Are Monopolies
Efficient?
44
Monopolies vs. Perfect Competition
S
=
MC
P
CS
In perfect competition,
CS and PS are
maximized.
Ppc
PS
D
Qpc
Q
45
S = MC
P
At MR=MC,
A monopolist will
produce less and
charge a higher price
Pm
Ppc
D
MR
Qm
Qpc
Q
46
Where is CS
and PS for a
monopoly?
P
S = MC
CS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
Pm
PS
Monopolies underproduce and over
D
charge, decreasing CS and
increasing
PS.
MR
Qm
Q
47
Are Monopolies Productively Efficient?
Does Price = Min ATC?
No. They are not producing at
the lowest cost (min ATC)
P
$9
8
7
6
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
48
Does Price = MC?
P
$9
8
7
6
No. Price is greater. The
monopoly is under
producing.
MC
ATC
5
4
3
D
Monopolies are NOT efficient!
2
MR
1 2 3 4 5 6 7 8 9 10 Q
49
Monopolies are inefficient because
they…
1. Charge a higher price
2. Don’t produce enough
• Not allocatively efficiency
3. Produce at higher costs
• Not productively efficiency
4. Have little incentive to innovate
Why?
Because there is little external pressure to be efficient
50
Natural Monopoly
One firm can produce the socially optimal quantity at the lowest co
due to economies scale.
P
It is better to have only one
firm because ATC is falling
at socially optimal quantity
MC
ATC
MR
D
Qsocially optimal Q
51
Lump Sum vs. Per Unit
Taxes and Subsidies
ACDC Econ Video
52