Transcript Power Point: Monopoly

Monopoly
When barriers to entry exist
1
Barriers to Entry
• Government franchises
• Patents and Copyright laws
• Economies of scale and other cost
advantages (Natural Monopoly:
Water, electricity)
• Ownership of a scarce factor of
production (De Beers)
• Using dominance to muscle
competition out of the market
2
(Intel)
Monopolists are
Price Setters
S
P
P
Do not react
to prices so
there is NO
supply curve
Face the
Market
Demand
Curve
P
P
D
Q Q Q Q
Do not take
price as
given
d
Choose Price and
Quantity to
1 2 Profit
3
Maximize
q q q
3
20
18
90
16 =
18 160
14 =16x10
x5
12 =14x15
10
=12x20
8
=10x25
210
240
250
250
240
=10x25
=8x30
Maximum
=6x35
Total Revenue
6
4
=4x40
2
0
5
10
210
160
2x45= 90
15 20
25 30 35
40
45
50
Choose Price and
Quantity to
Maximize
160
210
240
90
90
160
210
240
250
Profit NOT
Revenue
Monopoly
P1
P2
Perfect Competition
d
P
D
Q1 Q2
To sell more
units must reduce
price
q1 q2 q3
Can sell any amount at
market price
6
Monopoly
P
TR increase,
reach a
maximum and
decrease
Perfect Competition
TR increase
P
d
D
q1 q2 q 3
Midpoint
TR
TR
TR
TR
Q
Q
Quantity
0
X
X
1
2
X
Price
11
10
9
=
=
=
Total
Revenue
0
Marginal
Revenue
DTR/DQ
10
18
10/1 = 10
8/1= 8
3
4
5
6
7
8
9
8
7
6
5
4
3
2
24
28
30
30
28
24
18
6/1= 6
4/1= 4
2/1= 2
0/1= 0
-2/1= - 2
-4/1= - 4
-6/1= - 6
10
1
10
-8/1= - 8
Perfect Competition
Monopoly
MR decreases as Q
increases
MR is always the
same
P
P
MR=P
d
D
q1 q2 q 3
Midpoint
TR
MR
TR
Q
When TR
is MAX,
MR is
ZERO
TR
Q
Midpoint: TR
is MAX and
MR is ZERO
A Sales Revenue
Maximizer
produce where
MR = 0
4/7/2016
Midpoint
MR
10
Monopoly
Perfect Competition
P > MR
P = MR
P
P
d = Price
MR
MR
D
q1 q2 q 3
MR
TR
TR
Q
TR
Q
PERFECT COMPETITION: P = MR
MC
P=MR
P
MR = MC
MR=Price = MC
q*
Profit Max Output level
The monopolist’s profitmaximizing output and price:
The maximum price this
monopolist can charge for
Q units is P.
Choose Q
such that
MR = MC
MC
P
Go up to the
demand
curve to set
the price
D
Q
Q
13
MR
This is the “mark-up”
above cost resulting from
monopoly’s market power
MONOPOLY: P > MR
MC
Price > MC
MR = MC
q*
MR
Profit Max Output level
14
P
Q
Higher
Price
Lower
Quantity
17
PROFIT MAXIMIZATION
COMPETITIVE FIRMS
FOR
PERFECTLY
MC
ATC
AVC
P=MR
P
q*
Profit Max Output level
18
ATC
MC
P x Q = TR
AVC
P
TR
P=MR
TR – TC = Profit
ATC
AVC
FC
AFC x Q = FC
TC
VC
ATC x Q = TC
AVC x Q = VC
q*
Profit Max Output level
19
D
MC
SRATC1
LRAC
SRATC2
SRATC3
A
B
S
P2
C
P1
P0
E
I
D
G
P2
F
H
J
D
Q2
Q3Q1
MR
Q2
P0
Price Discrimination
• Charging different prices in different
markets.
• Markets must be separated for price
discrimination to work:
– To prevent those who get the lower price
from selling in the high price market.
29
Price Discrimination
Markets can be separated:
• Geographically: Sell at one (higher)
price in the U.S. and at a lower price
outside of the U.S. (Latin America)
• By age: adults, seniors, children
• By time: early bird discounts, hard
cover/soft cover versions of the
same book.
30
Part of Consumer Surplus is
Lost
MC
CS
Pm
Lost CS
WL
PS
D
Qm
MR
Qpc
31
Q
What would happen if the Monopolist price
discriminates?
Lost CS
becomes PS
P1
P2
P3
P4
P5
MC
P1xQ1
D
Q1
Q2 Q3 Q4 Q5
32
MR
Perfect Price Discrimination
MC
PS
D
• There is No Net Loss to
Society
33
When Monopolist Price
Discriminates
There is No Net Loss to
Society
34
The Social Costs of Monopoly
• Prices are higher
• Output is lower
• Some consumer surplus is reallocated to
producers
• Some consumer surplus is lost
• Monopolist does not produce at lowest
LRATC: not efficient.
Perfectly competitive
firm
Monopoly
Is entry into the market free or restricted?
Is exit out of the industry free or
restricted?
How does the firm choose the output
level?
Does the firms charge one price? Or does
it price discriminate?
Shape of Demand faced by the firm
Are producers price takers or price
setters?
Is MR greater than, less than or equal to
Price? WHY?
Do producers want to maximize profit or
do they produce for some other reason?
Do producers react to prices? In other
words: is there a Supply curve in this
market?
Is the price charged greater than, smaller
than or equal to MC?
36
Consumer surplus Perfect
Competition
Consumer
Surplus
MC
Ppc=$2
D
4000
Qpc
Consumer surplus Monopoly
Consumer
Surplus
Pm
MC
Ppc
D
MR
2000
4000
Units of output, Q
38
Producer Surplus Perfect
Competition
MC
Ppc
D
Qpc
39
Producer Surplus Monopoly
MC
Pm
PS
D
Qm
MR
40
Monopoly
Pm
MC
CS
PS
D
Qm
41
Lost Consumer Surplus due
to Monopoly
Pm
MC
CS
D
Qm
Qpc
MR
42
Q
Part of the Consumer’s Loss
becomes Producer’s Surplus
MC
CS
PS CS
Lost
WL
D
Qm
4000
MR Qpc
43
Q
Natural Monopoly
An industry where the technological advantages
of large-scale production allow a single firm to
produce at a lower cost than many smaller
companies.
44
Natural Monopoly
S
MC
ATC1
This
Demand
canone
be supplied
40 Firms
each
selling
by many
firms
each
a small
10,000
units
at with
$5/unit
plant of size ATC1
ONE firm selling
Or Demand can be supplied by
500,000 units at
ONE monopoly with a large
$3/unit
plant of size ATC5
5
3
MC ATC5
LRATC
D
MR
10,000
400,000 500,000
D
Examples of Price
Discrimination
• Airline Tickets
– Weekend Stay tickets cheaper
• Movie Tickets
– Senior Citizen Discount
• Groceries
– Supermarket Coupons
• Tuition
– Scholarships
• Books
– Hardcover vs. Soft cover
46
Marginal Cost
Average Total
Cost
Quantity (Pounds)
Price per pound
100
1.4
200
1.07
0.5
1.5
300
0.92
0.46
0.75
400
0.80
0.44
0.67
500
0.66
0.43
0.65
600
0.50
0.50
0.50
700
0.30
0.59
1
2
A perfectly competitive industry would charge a price of _____per pound
produce ______ at a per unit cost equal to _____and make a (profit/loss) equal
to _________ because entry is free, in the long run the perfectly competitive
firm makes a (profit/loss) equal to _____
A monopoly would charge a price of ______ per pound, produce ____ at a per
unit cost equal to _____ and make a (profit/loss) equal to _________ because
entry is restricted, in the long run the monopolist makes a (profit/loss) equal to
_____
Q
P
TR
0
MR
MC
Perfect Competition:
Choose output
where MC = Price
ATC
0
100
1.4
140
1.4
2
200
1.07
214
0.74
300
0.92
276
400
0.8
320
0.62 0.46 0.75
0.44 0.44 0.67
500
0.66
330
0.1
0.43 0.65
600
0.5
300
-0.3
0.5
700
0.3
210
-0.9 0.59
0.5
1.5
0.5
1
Monopolist: Choose
output where MC = MR
Q
P
MC
ATC
0
100
1.4
2
200
1.07
0.5
1.5
300
0.92
0.46
0.75
400
0.8
0.44
0.67
500
0.66
0.43
0.65
600
0.5
0.5
0.5
700
0.3
0.59
1
48
60
S
50
ATC
40
32
30
28
20
D
10
1
250
500
750
MR
A perfectly competitive industry would charge a price of _____per pound
produce ______ at a per unit cost equal to _____and make a (profit/loss) equal
to _________ because entry is free, in the long run the perfectly competitive
firm makes a (profit/loss) equal to _____
A monopoly would charge a price of ______ per pound, produce ____ at a per
unit cost equal to _____ and make a (profit/loss) equal to _________ because
entry is restricted, in the long run the monopolist makes a (profit/loss) equal to
_____
49
Q
0
250
500
P
60
50
40
TR
MR
MC
0
12500
10
(20000-0)/(500-0)=40
20000 (22500-12500)/750-250)=20 20
750
30
22500
30
Q
0
250
P
60
50
500
750
40
30
MC
10
20
30
50
260
MC
180
160
140
100
20
D
500
1000
MR
A perfectly competitive industry would charge a price of _____per pound
produce ______ at a per unit cost equal to _____and make a (profit/loss) equal
to _________ because entry is free, in the long run the perfectly competitive
firm makes a (profit/loss) equal to _____
A monopoly would charge a price of ______ per pound, produce ____ at a per
unit cost equal to _____ and make a (profit/loss) equal to _________ because
entry is restricted, in the long run the monopolist makes a (profit/loss) equal to
_____
25
MC
20
15
10
5
D
1000
MR
2000
1. If the market is perfectly competitive:
The price would be _____per unit and total production would be _____ units.
Consumer Surplus =
Producer Surplus =
Welfare Loss =
2. If the market becomes a monopoly:
The price would be ____ per unit and production would be _____ units.
Consumer Surplus =
Producer Surplus =
Welfare Loss =
Q
10
MC
8
6
4
2
D
700 MR
1500
1. If the market is perfectly competitive:
The price would be _____per unit and total production would be _____ units.
Consumer Surplus =
Producer Surplus =
Welfare Loss =
2. If the market becomes a monopoly:
The price would be ____ per unit and production would be _____ units.
Consumer Surplus =
Producer Surplus =
Welfare Loss =
Q
P
14
MC
10
8
6
2
D
50
0
80
0
MR
Q
P
28
MC
20
16
12
4
D
1000 1600
MR
Q
P
280
MC
200
160
12
0
40
D
100
160
MR
Q
10
MC
8
6
4
2
D
700 MR
1500
1. If the market is perfectly competitive:
The price would be _____per unit and total production would be _____ units.
Consumer Surplus =
Producer Surplus =
Welfare Loss =
2. If the market becomes a monopoly:
The price would be ____ per unit and production would be _____ units.
Consumer Surplus =
Producer Surplus =
Welfare Loss =
Q
For the following 5 slides calculate:
1.Profit maximizing output level
2.Price charged by the monopolist
3.Total Revenue
4.Total Cost
5.Variable Cost
6.Fixed Cost
7.Profit or Loss
8.Number of units the firm should produce in the short run and
explain why?
9.Number of units the firm should produce in the long run and
explain why?
© 2000 Claudia Garcia - Szekely
58
22
18
14
13
10
6
D
100 150 200
MR
22
18
14
13
10
6
D
100
150 200
MR
14
13
10
6
D
100 150 200
MR
Q
16
14
13
10
6
D
100 150 200
MR
Q
28
22
20
17
15
13
10
D
200
300400 500
MR
Q
2
2
1
8
1
4
1
3
1
0
6
D
100
150
20
0
MR
Calculate:
1.Profit maximizing output level =150
2.Price charged by each firm =13
3.Total Revenue =1950
4.Total Cost=18*150=2700
5.Variable Cost=14*150=2100
6.Fixed Cost =(14-18)*150=-600
7.Profit or Loss=(13-18)*150= -750
8.Number of units the firm should
produce in the short run and explain why?
0 shut down because FC(600) < loss if the
firms produce 150 units (750)
9.Number of units the firm should
produce in the long run and explain why? 0
exit because the firms incur a loss
2
2
18
1
4
13
10
6
D
100
150
200
MR
Calculate:
1.Profit maximizing output level = 150
2.Price charged by the fim = 13
3.Total Revenue = 13*150 = 1950
4.Total Cost = 18*150 = 2700
5.Variable Cost = 13*150 = 1950
6.Fixed Cost = (18-13)*150 = 750
7.Profit or Loss = (13-18)*150= -750
8.Number of units the firm should
produce in the short run and explain
why? =indifferent between 0 and 150
because the FC(750) = Loss (750) if the
firm produces 150 units
9.Number of units the firm should
produce in the long run and explain why?
= zero (exit) because the firms incur a
loss
Calculate:
1.Profit maximizing output level = 150
2.Price charged by the firm = 10
3.Total Revenue = 150*10= 1500
4.Total Cost = 11*150 = 1650
5.Variable Cost = 7*150 = 1050
6.Fixed Cost = (11-7)*150= 600
7.Profit or Loss =(10-11)&150=-150
8.Number of units the firm should
produce in the short run and explain
why? = 150 because FC (600) > loss (150)
9.Number of units the firm should
produce in the long run and explain why?
= 0 (exit) because firms incur a loss
11
10
7
6
4
D
100
150
200
MR
Q
Calculate:
1.Profit maximizing output level =150
2.Price charged by the firm = 13
3.Total Revenue = 13*150 =1950
4.Total Cost = 13*150= 1950
5.Variable Cost = 10*150=1500
6.Fixed Cost = (13-10)*150 = 450
7.Profit or Loss = 0
8.Number of units the firm should
produce in the short run and explain why?
= 150 because the FC(450) > loss (0) if
the firms produce 150 units
9.Number of units the firms should
produce in the long run and explain why? =
0 because the firms incur a loss
16
14
13
10
6
D
100
150
200
MR
Q
Calculate:
1.Profit maximizing output level = 300
2.Price charged by the firm = 20
3.Total Revenue = 20*300 = 6000
4.Total Cost = 17*300=5100
5.Variable Cost = 13*300 = 3900
6.Fixed Cost = (17-13)*300=1200
7.Profit or Loss = (20-17)*300=900
8.Number of units the firm should
produce in the short run and explain why?
= 300 because it makes a positive profit
9.Number of units the firm should
produce in the long run and explain why?
= 300 because it makes a positive profit
28
22
20
17
15
13
10
D
200
300 400
500
MR
Q
F
b
P1
P0
P2
S0
D
G
c
a
Q1 Q0
Price Consumer Pays =P1
Price Producer Receives = P2
Consumer Surplus =area F Producer Surplus =Area G
Tax Revenue = Area P1bcP0 Welfare Loss = Area D
Tax= distance ab. Consumers pay distance bc and producers pay distance ac. The consumer
pays the larger portion of the tax because their behavior is more inelastic.
Example
Q M = 10
PM =
5
Profit/Loss= 30
Qpc=
14
Ppc =
3
Q
4
10
12
14
16
18
Profit/Loss= 10
P
6
5
4
3
2
1
TR MR
24
50 4.333
48
-1
42
-3
32
-5
18
-7
TC
14
20
26
32
38
44
MC Profit
10
1
30
3
22
3
10
3
-6
3
-26
70