Ch. 15 Monopoly Only seller of a product …. With out close substitutes

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Presentation transcript:

Ch. 15 Monopoly Only seller of a product …. With out close substitutes Price Maker Market power alters the relationship b/w a firm’s price and its costs Perfect competition: P = …. MC Monopoly: P and MC? …. P>MC Can a Monopoly charge ANY price or earn ANY profit? … NO…….Confined by the D curve Govt. can sometimes improve market outcomes

Why Monopolies Arise 1. Key Resource define / give ex 2. Govt. Created …why? Personal/political reasons Best interest of society (promote efficiency, innovation) How does the government create a monopoly? Patent=20yrs Copyright

3. Natural- define and give ex… 3. Natural- define and give ex…. Utilities (gas, electric, cable) Ex: public goods and common resources -bridge p. 319 Most unattractive to try to enter Over time: with new technology/alternatives/changes in market conditions: All monopolies may give way to a Competitive Market…..(bridge example)

Perfect Competition: P and MR? … P=MR Monopoly: P and MR? ….. MR < P (except first unit) b/c …. downward sloping D curve (in order to sell 1 more, must lower price). So when sell one more, lower P = lower revenue on all units prior (since P=AR and D curve = AR) Perfect competition: P : MR : D relation?... P=MR=D Monopoly: P:MR:D relation? ….. (P>MR….so MR always < D curve) See ACDC Econ Video (Micro 4.1)

P.322: output effect on TR Sell one more and TR goes up as %change Q increases at greater rate than % change P decreases…..= Elastic Price effect on TR as as %change Q increases at lesser rate than % change P decreases…..= Inelastic (competitive firm has no price effect)

Profit in Perfect Competition vs. Monopoly P = MR = MC vs. P > MR = MC Compare Supply Curve : Perfect Competition vs. Monopoly A MONOPOLY DOES NOT HAVE A SUPPLY CURVE A supply curve tells us the Q that firms choose to supply at any given price Does NOT apply to Monopoly b/c = Price Maker Compare Profit (formula on graph) Perfect Competition and Monopoly Profit = P-ATC x Q Profit in Perfect Competition vs. Monopoly (short run vs. long run)(why the difference) Case Study Monopoly Drugs v. Generic Drugs 20 year patent vs. patent expires

Welfare Cost Perfect Competition S=D (P=MC) = Allocative Efficiency Monopoly : No supply curve; P> MR=MC Compare Production: Perf Comp vs. Monopoly Which market structure produces more? Monopoly: Produce less than allocatively efficient = not socially efficient Fail to maximize…… economic welfare …so creates….. Deadweight loss

P=ATC : Fair Market Price; Break Even; Zero Profit P=MC : Allocatively Efficient; Socially Optimal; Max.Econ. Welfare; Perf.Comp.