Transcript AP Micro 4-1 Intro to Monopolies

Unit 4:
Imperfect
Competition
1
What do you remember about?
1. The candy market simulation. How did it
work? What did we see?
2. The different markets. What were some of
the differences?
Supafast Review
1. If a firm is making normal economic
profits, is their accounting profit positive,
zero, or negative? Why?
2. Where is the shut down point for a firm?
Why is the shutdown point located there?
3. What’s the difference between a lump-sum
& per-unit tax & subsidy. Which costs are
affected by each?
Accounting & Economic Profit
Remember, all of the costs and profits
we’ve been examining are economic profit,
meaning we are considering opportunity
costs (like foregone wages, capital
depreciation, etc.)
If a firm is making economic profit or
normal profit, then they are definitely
making accounting profit.
Accounting & Economic Profit
Economic Profit = TR – (Explicit Costs + Implicit Costs)
EP
= $1,000 – ($400 + $600)
EP
= $1,000 - $1,000
EP
= $0 = Normal Profits
Accounting Profit = TR – Explicit Costs
AP
= $1,000 - $400
AP
= $600 (+)
Cost and Revenue
SHUT DOWN! Produce Zero
MC
$9
8
7
6
5
4
3
2
1
ATC
AVC
Minimum AVC
is shut down
point
1 2 3 4 5 6 7 8 9 10 Q
6
Lump Sum v. Per Unit
Definition
Change ATC?
Change MC?
Lump Sum
Subsidy
One-time
Decreases fixed
payment from the costs
government
regardless of
Decreases ATC
production
Decreases fixed
costs
Lump Sum
Tax
One-time charge
paid to the
government
regardless of
production
Increases fixed
costs
Increases fixed
costs
Increases ATC
No change on MC
No change on MC
Lump Sum v. Per Unit
Definition
Change ATC?
Change MC?
Per-Unit
Subsidy
Payment from the Decreases variable Decreases variable
government that costs
costs
changes
depending on
Decreases ATC
Decreases MC
production
Per-Unit Tax
Charges paid to
the government
that change
depending on
production
Increases variable
costs
Increases variable
costs
Increases ATC
Increases MC
4 Market
Structures
9
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Imperfect Competition
Every product is sold in a market that can be
considered one of the above market structures.
For example:
•Fast Food Market
•The Market for Cars
•Market for Operating Systems (Microsoft)
•Strawberry Market
•Cereal Market
10
Characteristics of
Monopolies
11
Discuss
1. What do you think might be some
characteristics of monopolies? Can you
come up with 5?
2. What examples of a monopoly can you
think of?
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).
Ex: California electric companies
13
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.
14
Examples of
Monopolies
15
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.
16
17
Four Origins of Monopolies
1. Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, sports
teams, Cable TV…
-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)
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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 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.
19
Drawing
Monopolies
20
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
21
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!
22
Combine the Demand of an industry
with the costs of a firm.
MC
Price
ATC
What about MR?
D
Quantity
23
Combine the Demand of an industry
with the costs of a firm.
MC
Price
ATC
D
MR
Quantity
24
Why is MR less than
Demand?
P Qd
$11 0
TR MR
0
-
25
Why is MR less than
Demand?
$10
P Qd
$11 0
$10 1
TR MR
0
10 10
26
Why is MR less than
Demand?
$10
$9
P Qd
$11 0
$10 1
$9
2
TR MR
0
10 10
18
8
$9
27
Why is MR less than
Demand?
$10
$9
$9
$8
$8
P Qd
$11 0
$10 1
$9
2
$8
3
TR MR
0
10 10
18
8
24
6
$8
28
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
P Qd
$11 0
$10 1
$9
2
$8
3
$7
4
TR MR
0
10 10
18
8
24
6
28
4
$7
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Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
P Qd
$11 0
$10 1
$9
2
$8
3
$7
4
$6
5
TR MR
0
10 10
18
8
24
6
28
4
30
2
$6
30
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 0
$10 1
$9
2
$8
3
$7
4
$6
5
$5
6
TR MR
0
10 10
18
8
24
6
28
4
30
2
30
0
$5
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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 0
$10 1
$9
2
$8
3
$7
4
$6
5
$5
6
$4
7
TR MR
0
10 10
18
8
24
6
28
4
30
2
30
0
28 -2
$4
32
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 0
$10 1
$9
2
$8
3
$7
4
$6
5
$5
6
$4
7
TR MR
10 10
18
8
24
6
28
4
30
2
30
0
28 -2
$4
33
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 0
$10 1
$9
2
$8
3
$7
4
$6
5
$5
6
$4
7
TR MR
10 10
18
8
24
6
28
4
30
2
30
0
28 -2
MR
$8 IS LESS THAN
$7 $7 PRICE
$4
34
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
35
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
36
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
37
Calculating
Marginal Revenue
38
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
39
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
40
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
41
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
42
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
43
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
44
Elastic vs. Inelastic
Range of Demand Curve
45
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
46
9 10 11 12 13 14 15 16 17 18
Maximizing
Profit
47
What output should this monopoly produce?
MR = MC
How much is the TR, TC and Profit or Loss?
P
MC
$9
8
ATC
7 Profit =$6
6
TR =$42
5
TC =$36
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
48
Conclusion: A monopolists produces where
MR=MC, buts charges the price consumer are
willing to pay identified by the demand curve.
P
$9
8
MC
ATC
7
6
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
49
What if cost are higher?
How much is the TR, TC, and Profit or Loss?
MC
P
ATC
$10
AVC
9
8
7
6
D
5
4
TR= $90
TC= $100
Loss=$10
MR
3
6 7 8 9 10
Q
50
Identify and
TR=
Calculate:
TC=
Profit/Loss=
Profit/Loss per Unit=
P
$70
$56
$14
$2
MC
ATC
$10
9
8
7
D
6
5
MR
4
1 2 3 4 5 6 7 8
9 10
Q
51
Review
1. Partner up. Have 1 partner draw a
monopoly graph. Have the other partner
explain the graph, and make any necessary
changes.
Are Monopolies
Efficient?
53
What do you remember about?
1. What are different ways to measure
efficiency?
2. What is deadweight loss? How does
deadweight loss affect efficiency?
3. In perfect competition, what was
productive efficiency?
Monopolies vs. Perfect Competition
S = MC
P
CS
In perfect competition,
CS and PS are
maximized.
Ppc
PS
D
Qpc
Q
55
Monopolies vs. Perfect Competition
S = MC
P
At MR=MC,
A monopolist will
produce less and
charge a higher price
Pm
Ppc
D
MR
Qm
Qpc
Q
56
Monopolies vs. Perfect Competition
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
57
Are Monopolies Productively Efficient?
Does Price = Min ATC?
P
$9
8
No. They are not
producing at the lowest
cost (min ATC)
MC
ATC
7
6
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
58
Are Monopolies Allocatively Efficiency?
Does Price = MC?
P
$9
8
No. Price is greater.
The monopoly is under
producing.
MC
ATC
7
6
5
4
D
Monopolies are NOT efficient!
3
2
MR
1 2 3 4 5 6 7 8 9 10 Q
59
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
60