Transcript ch09, lecture

Chapter 9
Monopoly
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
What is a monopoly?
• Single seller
• Unique product
• Impossible entry
into the market
2
What are the most
common monopolies?
Local monopolies are more
common real-world
approximations of the
model than national or
world market monopolies
3
What does it mean to
have a unique product?
There are no close
substitutes for the
monopolists product
4
What are some
examples of
impossible entry?
• Owner of a vital resource
• Legal barriers
• Economies of scale
5
What is a
natural monopoly?
An industry in which
the long-run average
cost of production
declines throughout
the entire market
6
What is unique about a
natural monopoly?
A single firm will produce
output at a lower per-unit
cost than two or more
firms in the industry
7
What is a price maker?
A firm that faces a
downward-sloping
demand curve
8
What is the difference
between monopoly and
perfect competition?
The D and MR curves
of the monopolist are
downward sloping; in
perfect competition
they are horizontal
9
What is unique about
the demand curve for
a monopolist?
The monopolist
demand curve and the
industry demand curve
are one in the same
10
Cost per Unit (dollars)
40
35
30
25
20
15
10
5
Minimizing Costs in a
Natural Monopoly
5 firms
2 firms
1 firm
Quantity of Output
20
40
60
80
100
11
What determines price
for a monopolist?
Demand
12
Why is MR < P for all but
the first unit of output?
To sell additional units,
the price has to be
lowered; this price-cut
applies to all units, not
just the last unit
13
0
$-25
$-50
$-75
$-100
Price & Marginal Revenue
$100
$75
$50
$25
Monopoly
2 4 6 8 10 12 14 16 18 Q
14
Monopoly
$300
$200
$100
Total Revenue
$400
2 4 6 8 10 12 14 16 18 Q
15
Where does a
monopolist produce to
maximize profit or
minimize losses?
MR = MC
16
P
$200
$175
$150
$125
$100
$75
$50
$25
MR=MC
MC
ATC
Profit
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
17
P
$200
$175
$150
$125
$100
$75
$50
$25
MC
ATC
MR=MC
Loss
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
18
Can a monopolist
make a profit in the
long-run?
If the positions of a
monopolist’s demand and
cost curves give it a profit
and nothing disturbs
these curves, it can make
a profit in the long-run
19
What is
price discrimination?
The practice of a seller
charging different prices for
the same product not
justified by cost differences
20
What is arbitrage?
The practice of earning a
profit by buying a good at
a low price and reselling
the good at a higher price
21
Is price
discrimination unfair?
Many buyers benefit from
the discrimination by not
being excluded from
purchasing the product
22
Is monopoly efficient?
A monopolist is inefficient
because resources are
underallocated to the
production of its product
23
P
Price Discrimination
Market for average students
MR=MC
T1
MC
MR
Q1
D
Q
24
P
Monopolist
MR=MC
Price Discrimination
Market for Superior Students
MC
T2
MR
Q2
D
Q
25
Is perfect
competition efficient?
A perfectly competitive firm
that produces where P =
MC achieves an efficient
allocation of resources
26
P
Perfect Competition
MR=MC
MC
MR, D
Pc
Qc
Q
27
P
MR=MC
Monopolist
MC
Pm
MR
Qm
D
Q
28
How does monopoly
harm consumers?
It charges a higher price
and produces a lower
quantity than would be
the case in a perfectly
competitive situation
29
P
Impact of Monopolizing
and Industry
MR=MC
MC
Pm
Pc
MR
Qm Qc
D
Q
30
What is the case
against monopoly?
• Higher price
• Charges a Price > MC
• Long-run economic profit
• Alters the distribution of
income to favor monopolist
31
Key Concepts
32
Key Concepts
•
•
•
•
•
What is a monopoly?
What is a natural monopoly?
What is unique about a natural monopoly?
What is a price maker?
What is the difference between monopoly
and perfect competition?
• Why is MR < P for all but the first unit of
output?
33
Key Concepts cont.
• Where does a monopolist produce to
maximize profit or minimize losses?
• Can a monopolist make a profit in the longrun?
• What is price discrimination?
• How does monopoly harm consumers?
34
Summary
35
Monopoly is a single seller facing
the entire industry demand curve
because it is the industry. The
monopolist sells a unique
product, and extremely high
barriers to entry protect it from
competition.
36
Barriers to entry that prevent new
firms from entering an industry are
(1) ownership of an essential
resource, (2) legal barriers, and (3)
economies of scale. Government
franchises, licenses, patents, and
copyrights are the most obvious
legal barriers to entry.
37
A natural monopoly arises
because of of economies of scale
in which the LRAC curve falls as
production increases.
38
Without government restrictions,
economies of scale allow a single
firm to produce at a lower cost
than any firm producing a smaller
output. Thus, smaller firms leave
the industry, new firms fear
competing with the monopolist,
and the result is that a monopoly
emerges naturally.
39
Cost per Unit (dollars)
40
35
30
25
20
15
10
5
Minimizing Costs in a
Natural Monopoly
5 firms
2 firms
1 firm
Quantity of Output
20
40
60
80
100
40
A price-maker firm faces a
downward-sloping demand
curve. It therefore searches its
demand curve to find the priceoutput combination that
maximizes its profit and
minimizes its loss.
41
The marginal revenue and the
demand curves are downwardsloping for a monopolist. The
marginal revenue curve for a
monopolist is below the demand
curve, the total revenue curve
reaches its maximum where
marginal revenue equals zero.
42
Price elasticity of demand
corresponds to sections of the
marginal revenue curve. When
MR is positive, price elasticity of
demand is elastic, Ed > 1. When
MR is equal to zero, price
elasticity of demand is unit
elastic, = 1. When MR is
negative, price elasticity of
demand is inelastic, Ed < 1.
43
The short-run-profit-maximizing
monopolist, like the perfectly
competitive firm, locates the profitmaximizing price by producing the
output where the MR and the
MAC curves intersect. If this is
less than the AVC curve, the
monopolist shuts down to
minimize losses.
44
P
$200
$175
$150
$125
$100
$75
$50
$25
MR=MC
MC
ATC
Profit
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
45
P
$200
$175
$150
$125
$10
0
$75
$50
$25
MC
ATC
MR=MC
Loss
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
46
The long-run-profit-maximizing
monopolist earns a profit because of
barriers to entry. If demand and cost
conditions prevent the monopolist
from earning a profit, it will leave the
industry.
47
Price discrimination allows the
monopolist to increase profits by
charging buyers different prices,
rather than a single price.
48
Three conditions are necessary
for price discrimination: (1) the
demand curve must be
downward-sloping, (2) buyers in
different markets must have
different price elasticities of
demand, and (3) buyers must be
prevented from reselling the
product at a higher price than the
purchase price.
49
P
Price Discrimination
Market for average students
MR=MC
T1
MC
MR
Q1
D
Q
50
P
Price Discrimination
Monopoli
Market for superior students
st
MR=MC
MC
T2
MR
Q2
D
Q
51
Monopoly disadvantages are these:
(1) A monopolist charges a higher
price and produces less output than
a perfectly competitive firm, (2)
resource allocation is inefficient
because the monopolist produces
less than if competition existed, (3)
monopoly produces higher long-run
profits than if competition existed,
and (4) monopoly transfers income
from consumers to producers to a
greater degree than under perfect
competition.
52
P
Perfect Competition
MR=MC
MC
MR, D
Pc
Qc
Q
53
P
MR=MC
Monopolist
MC
Pm
MR
Qm
D
Q
54
Chapter 9 Quiz
©2002 South-Western College Publishing
55
1. A monopolist always faces a demand
curve that is
a. perfectly inelastic.
b. perfectly elastic.
c. unit elastic.
d. the same as the market demand
curve.
D. A monopoly is the only seller, so there
is no distinction between the market
demand curve and the individual
demand curve.
56
2. A monopoly sets the
a. price at which marginal revenue
equals zero.
b. price that maximizes total revenue.
c. highest possible price on its demand
curve.
d. price at which marginal revenue
equals marginal cost.
D. Profits are always maximized if the
firm produces at the point where MR
= MC.
57
P
$80
$70
$60
$50
$40
$30
$20
$10
MR=MC
MC
ATC
Profit
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
58
3. A monopolist sets
a. the highest possible price.
b. a price corresponding to the
minimum average total cost.
c. a price equal to marginal revenue.
d. a price determined by the point on
the demand curve corresponding to
the level of output at which marginal
revenue equals marginal cost.
D. Demand determines price in all
market forms.
59
4. Which of the following is true for the
monopolist?
a. Economic profit is possible in the
long-run.
b. Marginal Revenue is less than the
price charged.
c. Profit-maximizing or loss-minimizing
occurs when marginal revenue equals
marginal cost.
d. All of the above.
D. All of the above are
characteristics of a monopoly.
60
P$40
Exhibit 8
MC
$30
ATC
$20
AVC
$10
MR
100
200
300
D
Q
400
61
5. As shown in Exhibit 8, the profitmaximizing or loss-minimizing
output for this monopolist is
a. 100 units a day.
b. 200 units a day.
c. 300 units a day.
d. 400 units a day.
B. 200 units is the point at which MR =
MC.
62
6. As shown in Exhibit 8, this
monopolist
a. should shut down in the shortrun.
b. should shut down in the longrun.
c. earns zero economic profit.
d. earns positive economic profit.
D. At the point where MR = MC (on the
vertical line), P is greater than ATC;
therefore, total revenue is greater than
total cost and an economic profit is
being made.
63
7. To maximize profit or minimize loss, the
monopolist in Exhibit 8 should set its
price at
a. $30 per unit.
b. $25 per unit.
c. $20 per unit..
d. $10 per unit.
B. Maximum profit or minimized losses
are found by drawing a vertical line
where MR = MC. This line intersects
the demand curve at $25.
64
8. If the monopolist in Exhibit 8
operates at the profit-maximizing
output, it will earn total revenue to
pay about what portion of its total
fixed cost?
a. None.
b. One-half.
c. Two-thirds.
d. All fixed costs.
D. Since the monopolist is making a
profit, it can pay all of its fixed costs.
65
9. For a monopolist to practice effective
price discrimination, one necessary
condition is
a. identical demand curves among groups
of buyers.
b. differences in the price elasticity of
demand among groups of buyers.
c. that the product is homogeneous.
d. none of the above.
B. Price discrimination takes place when
a monopolist is faced with buyers that
are widely different; therefore, the
buyers elasticity of demand for the
product will be different.
66
10. What is the act of buying a commodity
in one market at a lower price and
selling it in another market at a higher
price?
a. Buying short.
b. Discounting.
c. Tariffing.
d. Arbitrage.
D. The practice of earning a profit by
buying a good at a low price and
reselling the good at a higher price
67
11. Under both perfect competition and
monopoly, a firm
a. is a price taker.
b. is a price maker.
c. will shut down in the short urn if price
falls short of average total cost.
d. always earns a pure economic profit.
e. sets marginal cost equal to marginal
revenue.
E. The profit maximizing output for any
firm is where MR = MC.
68
END
69