Transcript Chapter 10: Monopoly

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10
Monopoly
Prepared by:
Fernando Quijano and Yvonn Quijano
© 2003 Prentice Hall Business Publishing
Economics: Principles and Tools, 3/e
O’Sullivan/Sheffrin
Introduction to Monopoly
• Read over the introductory paragraph on page
213 of your textbook.
• Working with a partner, answer the big
question:
“Who is really paying for the scoreboard, and the
student center?”
© 2003 Prentice Hall Business Publishing
Economics: Principles and Tools, 3/e
Monopoly
• Monopoly is a market in which a single firm
serves the entire market.
• Exists when there is a “barrier to entry”
• Patent: The exclusive right to sell a particular
good for some period of time.
• Franchise or licensing scheme: A policy
under which the government picks a single
firm to sell a particular good.
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Economics: Principles and Tools, 3/e
Dragon’s Den
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Economics: Principles and Tools, 3/e
Total Revenue and Marginal Revenue
Demand, Total Revenue, and Marginal Revenue
Price
Quantity Sold
$16
0
0
$14
1
$14
$14
$12
$10
$ 8
$ 6
2
3
4
5
$24
$30
$32
$30
10
6
2
-2
$ 4
6
$24
-6
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Total Revenue
Marginal Revenue
Economics: Principles and Tools, 3/e
Total Revenue and Marginal Revenue
• As the firm cuts its price
to sell more output, its
total revenue rises for
the first 4 units sold, but
then decreases for the
5th and 6th units.
• Marginal revenue (the
change in total revenue
from selling one more
unit) is positive for the
first 4 units and then
becomes negative.
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Economics: Principles and Tools, 3/e
Demand Curve and
Marginal Revenue Curve
• Marginal revenue is equal to
the price for the first unit
sold, but is less than price
for all other units sold.
• To increase the quantity
sold, a firm cuts its price and
receives less revenue on the
units that could have been
sold at the higher price.
© 2003 Prentice Hall Business Publishing
Economics: Principles and Tools, 3/e
The Marginal Principle
and the Output Decision
Marginal PRINCIPLE
Increase the level of an activity if its marginal
benefit exceeds its marginal cost; reduce the
level of an activity if its marginal cost exceeds
its marginal benefit. If possible, pick the level
at which the activity’s marginal benefit equals
its marginal cost.
© 2003 Prentice Hall Business Publishing
Economics: Principles and Tools, 3/e
Using the Marginal Principle
to Pick a Price and Quantity
Price
Quantity
Marginal Marginal
Total
(per Dose) sold (Doses) Revenue
Cost
Revenue
Total
Cost
Profit
$18
600
$12
$4.00
$10,800
$5,710
$5,090
$17
700
$10
$4.60
$11,900
$6,140
$5,760
$16
800
$8
$5.30
$12,800
$6,635
$6,165
$15
900
$6
$6.00
$13,500
$7,200
$6,300
$14
1,000
$4
$6.70
$14,000
$7,835
$6,165
$13
1,100
$2
$7.80
$14,300
$8,560
$5,740
$12
1,200
0
$9.00
$14,400
$9,400
$5,000
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Economics: Principles and Tools, 3/e
Monopolist Picks
a Quantity and a Price
• To maximize profit, the
monopolist picks point n,
where marginal revenue
equals marginal cost.
• The monopolist produces
900 doses per hour at a
price of $15 (point m).
• The average cost is $8
(point c).
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Economics: Principles and Tools, 3/e
Monopolist Picks
a Quantity and a Price
• The marginal cost of the
600th dose is $4 as
shown by point j on the
marginal cost curve.
• The extra revenue
associated with dose
number 600 is shown by
point i on the marginal
revenue curve, the
marginal revenue is $12.
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Economics: Principles and Tools, 3/e
Monopoly Versus Perfect Competition
• The market price under a monopoly will be higher
then in a perfectly competitive market
• This reduces market consumer surplus
• Lose market efficiency!
• Deadweight loss from monopoly: A
measure of the inefficiency from monopoly;
• The deadweight loss is equal to the
difference between the consumer-surplus loss
from monopoly pricing and the monopoly
profit.
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Economics: Principles and Tools, 3/e
Deadweight Loss from Monopoly
• A switch from perfect
competition to
monopoly increases the
price from $8 to $18
and decreases the
quantity sold from 400
to 200 doses.
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Economics: Principles and Tools, 3/e
The Market Effects of Taxi Medallions
Consumer surplus = area between demand curve and price
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Economics: Principles and Tools, 3/e
Deadweight Loss from Monopoly
• Consumer Surplus
= area between demand
curve and price
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Economics: Principles and Tools, 3/e
Deadweight Loss from Monopoly
• Consumer surplus
decreases by an amount
shown by the areas R and
D, while profit increases by
the amount shown by
rectangle R.
• The net loss to society is
shown by triangle D (the
deadweight loss of
monopoly.
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Economics: Principles and Tools, 3/e
Rent Seeking: Using Resources
to Get Monopoly Power
• Rent Seeking: The process under which a
firm spends money to persuade the
government to erect barriers to entry and pick
the firm as the monopolist.
• Another source of inefficiency in a monopoly
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Economics: Principles and Tools, 3/e
Natural Monopoly
• A natural monopoly is a market in which the
entry of a second firm would make price less
than average cost, so a single firm serves the
entire market.
• The average-cost pricing policy is a
regulatory policy under which the government
picks the point on the demand curve at which
price equals average cost.
© 2003 Prentice Hall Business Publishing
Economics: Principles and Tools, 3/e