Transcript 7.2 x
WED. 3/9 What is the objective of the board game monopoly? CH. 7 MARKET STRUCTURES 7.2 Notes “Monopoly” MONOPOLY Monopolies form when barriers prevent firms from entering a market that has a single supplier If buyers are broad in their search they can usually find a substitute With a monopoly there are no substitutes The problem w/ monopolies is that they can take advantage of their market power and charge a high price FORMING A MONOPOLY Economies of scale Producers average cost of production to drop as quantity supplied increases Must meet two conditions: 1. Start-up cost are high 2. Average cost fall for each additional unit produced Why? Large fixed costs can be spread out among each additional unit produced Natural monopoly Where the market can only support one large firm If a second firm enters the market, the price per unit will drop drastically forcing one or both out of business Ie: Public water, electricity Technology and Change Innovation sometimes can cut fixed costs making small firms as efficient as large ones Ie: cell phone companies GOVERNMENT MONOPOLIES Sometimes the government creates artificial barriers to entry to allow a firm time to invest and develop a specific technology Encourages firms to research and develop new products who’s start up costs are very high Market power established by the patent allows the firm to maximize its profit Ie: pharmaceutical companies Franchise Where local authorities provide a single firm the right to sell goods within a small market Ie: soft drink companies in restaurants, bball parks etc. License Same as a franchise but on a much larger scale Ie: radio, television Industrial Organization The government restricts the number of firms in a market MLB (official exemption), NHL, NFL, NBA All are monopolies because they collude OUTPUT DECISIONS Monopolists face a limited choice, either: 1. Output 2. Price Since a firm usually chooses to maximize its profits, the firm will produce fewer goods at a larger price Monopolists dilemma Law of demand As quantity demanded increases prices decline Falling marginal revenue Perfectly Competitive Market Marginal revenue: the amount earned from the last unit sold In a perfectly competitive market marginal revenue is always equal to price Each firm receives the same price no matter how much it produces, thus revenue grows at a steady rate with production In a monopoly firms have some control over price Marginal revenue is less than price Setting Price If the motivation for a firm is profit then…. The firm will choose the output that yields the highest profit regardless of demand Profit Calculate the profit with the production set at 9,000 doses Copy the demand schedule in fig. 7.6 from your text. PRICE DISCRIMINATION 1. Discounted airline fares Business travelers vs vacationing families. Buy tickets in advance vs short notice. Higher price for Friday flights vs Saturday flights 2. Manufacture rebate offers Appeals to people who are unwilling to pay full price. 3. Senior citizen or student discount Lower income, unable to pay full price 4. Children fly or stay free Families spend more money on food, clothing, school less money for vacation Firms willing to make less profit to have their business by offering discount Limits of Price Discrimination (Must have all 3) 1. Some market power Must have some control over price, this is why you don not see them in highly competitive markets 2. Distinct customer groups Based on their sensitivity to price Ie: students, senior citizens 3. Difficult resale Works best if consumed on the spot, eliminates chance of resale Theme parks, restaurants CHECKING FOR UNDERSTANDING 1. List the characteristics of a monopoly. 2. What can a firm with market power do? 3. Why does govt. usually approve of natural monopolies?