Table of Contents Access Prior Knowledge New Information Set Goals Activity Conclusion How Much to Charge “Monopoly” Learning Targets A Monopolist’s Demand Curve Monopoly Profits “Monopoly” Learning Targets Marginal Revenue In Monopoly Profit Maximization In Monopoly Perfect Competition vs. Monopoly Price Discrimination How Price Discrimination Works

How Much to Charge You are in charge of selling tickets at your high school’s next Friday night football game. Your goal is to maximize profits, not maximize attendance. The teacher will lead a survey to see how many tickets are demanded at various prices. Using this data, and the knowledge that each additional ticket sold carries a marginal cost of $1.00, find the price that will result in the largest profit for your school. Take the Survey Students can either work individually or in groups to solve this problem. Refer to the teacher lesson plan for more information on how to make this a success. You will need to survey students about what is the highest price each student would pay for a ticket to your high school’s football game. The next slide has a table that you can write the data directly on. If you are not projecting this onto a writable surface, you will need to copy the table onto a convenient location on the board.

Number Who Would Pay This as the Highest Price How Much to Charge You are in charge of selling tickets at your high school’s next Friday night football game. Your goal is to maximize profits, not maximize attendance. The teacher will lead a survey to see how many tickets are demanded at various prices. Using this data, and the knowledge that each additional ticket sold carries a marginal cost of $1.00, find the price that will result in the largest profit for your school. Price (P) Number Who Would Pay This as the Highest Price Quantity Demanded (Q) Total Cost (TC) Marginal Cost (MC) Total Revenue (TR) Marginal Revenue (MR) Profit (TR - TC) $8 - $7 $1 $6 $5 $4 $3 $2 $0 If you are projecting the slideshow onto a whiteboard, which is recommended, you can actually write the numbers onto the board in the proper table cells. You will need to tell the students to think of the highest price they would pay for a ticket to the football game. (If your high school does not have a football team, use a different sport or maybe a musical or band concert.) Starting at $8, ask students how many would be willing to pay $8 to go to the football game. Write this number in the first cell in the first blank column entitled “Number Who Would Pay This as the Highest Price.” Then ask how many would pay $7. Write this number in the corresponding table cell. Conduct this survey all the way down to $0. When you have finished the survey, you can now calculate the “Quantity Demanded” column. This column is a cumulative total. For $8, simply “slide over” the first number from the survey. For $7, add the first number from the survey with the second number from the survey. For $6, add the first, second, and third numbers from the survey. Continue doing this all the way down to $0. Now that the students have this data, they can begin working independently to solve the problem. Click the “Forward” button when you are ready to go to the graph.

How Much to Charge Plot the data from the table onto this graph. Plot only “Quantity Demanded,” “Marginal Cost,” and “Marginal Revenue.” Be sure to label each curve. CONCLUSION How much will you charge for a ticket? Will this price cause some willing ticket purchasers to forgo buying a ticket? How many? Help students graph the data on their sheets. Once again, if projecting this slideshow onto a whiteboard, you can simply draw the three curves onto the image with a whiteboard marker. It is easiest to have a student draw the graph on the board since he/she has the data written on his/her sheet. Also, there are questions to answer as a whole class when the graphing is done.

“Monopoly” Learning Targets Knowledge 4 Understand the rationale and effects of price discrimination in a market controlled by a monopolist. Reasoning 6 Explain how a monopolist maximizes profits. Skill 2 Calculate marginal revenue, total revenue, and profit.

A Monopolist’s Demand Curve The demand curve faced by a monopolist differs from the demand curve faced by a perfectly competitive firm.

A Monopolist’s Demand Curve The demand curve faced by a monopolist differs from the demand curve faced by a perfectly competitive firm. DC = Price 1) Perfect Competition A) Each individual firm’s demand curve is flat. This is true because there are numerous sellers under perfect competition. No one seller can increase price without losing all sales. Thus, this is the demand curve faced by a price taker.

A Monopolist’s Demand Curve The demand curve faced by a monopolist differs from the demand curve faced by a perfectly competitive firm. DC = Price 1) Perfect Competition A) Each individual firm’s demand curve is flat. B) The firm cannot affect market price.

A Monopolist’s Demand Curve The demand curve faced by a monopolist differs from the demand curve faced by a perfectly competitive firm. DC = Price 1) Perfect Competition A) Each individual firm’s demand curve is flat. B) The firm cannot affect market price. 2) Monopoly DM A) A monopolist faces a sloped demand curve. This is true because there is only one seller in a monopoly. The seller can increase or decrease price and affect his/her profits. Thus, the sloped demand curve is the demand curve faced by a price maker.

A Monopolist’s Demand Curve The demand curve faced by a monopolist differs from the demand curve faced by a perfectly competitive firm. DC = Price 1) Perfect Competition A) Each individual firm’s demand curve is flat. B) The firm cannot affect market price. 2) Monopoly DM A) A monopolist faces a sloped demand curve. Under perfect competition, the sum of all individual demand curves makes up the market demand curve. Under monopoly, because there is only one firm, the firm’s demand curve IS the market demand curve. B) The individual firm’s demand is the market demand.

Marginal Revenue in Monopoly The monopolist’s MR curve also differs from the perfect competition MR curve.

Marginal Revenue in Monopoly The monopolist’s MR curve also differs from the perfect competition MR curve. 1) Under perfect competition, MR is flat and is equal to price. MR = Price

Marginal Revenue in Monopoly The monopolist’s MR curve also differs from the perfect competition MR curve. 1) Under perfect competition, MR is flat and is equal to price. 2) Because a monopolist’s demand is downward sloping, so is MR. D MR Price Qty TR MR $8 $0 - $7 1 $6 2 $12 $5 3 $15 $3 $4 4 $16 $1 5 -$1 $2 6 -$3 7 -$5 8 -$7

Marginal Revenue in Monopoly The monopolist’s MR curve also differs from the perfect competition MR curve. 1) Under perfect competition, MR is flat and is equal to price. 3) MR is always below demand for a firm with market power. 2) Because a monopolist’s demand is downward sloping, so is MR. D MR Price Qty TR MR $8 $0 - $7 1 $6 2 $12 $5 3 $15 $3 $4 4 $16 $1 5 -$1 $2 6 -$3 7 -$5 8 -$7

Marginal Revenue in Monopoly The monopolist’s MR curve also differs from the perfect competition MR curve. 1) Under perfect competition, MR is flat and is equal to price. 3) MR is always below demand for a firm with market power. 2) Because a monopolist’s demand is downward sloping, so is MR. 4) Total revenue increases at first, but decreases when MR is negative. D MR TR Price Qty TR MR $8 $0 - $7 1 $6 2 $12 $5 3 $15 $3 $4 4 $16 $1 5 -$1 $2 6 -$3 7 -$5 8 -$7 D MR

Profit Maximization in Monopoly Let’s assume a monopoly has no fixed costs and marginal cost is always $1. MC = ATC Price Qty MC MR $8 - $7 1 $1 $6 2 $5 3 $4 4 $3 5 $2 6 7 $0 8 Making this assumption helps students visualize this concept better because it makes the MC curve flat. Obviously, marginal cost would likely start increasing due to the Law of Diminishing Returns at some point, but a flat MC curve is the usual way of teaching about monopolies. Also, it is important to point out that MC is also the same as average total cost (ATC) when MC is flat. (A changing MC curve, which would mean a varying ATC curve, is beyond the scope of this lesson.)

Profit Maximization in Monopoly Let’s assume a monopoly has no fixed costs and marginal cost is always $1. 1) To maximize profits, a monopoly still produces where MR = MC. MC = ATC MR A MC = ATC Price Qty MC MR $8 - $7 1 $1 $6 2 $5 3 $4 4 $3 5 $2 6 7 $0 8 Price Qty MC MR $8 - $7 1 $1 $6 2 $5 3 $3 $4 4 5 -$1 $2 6 -$3 7 -$5 $0 8 -$7

Profit Maximization in Monopoly Let’s assume a monopoly has no fixed costs and marginal cost is always $1. 1) To maximize profits, a monopoly still produces where MR = MC. 2) MR = MC at 4 units, but price is $4, not $1. MR A MC = ATC Price Qty MC MR $8 - $7 1 $1 $6 2 $5 3 $3 $4 4 5 -$1 $2 6 -$3 7 -$5 $0 8 -$7 Show students that the table clearly states that MR = MC at a price of $4. Click to the next slide to see how this works on the graph.

Profit Maximization in Monopoly Let’s assume a monopoly has no fixed costs and marginal cost is always $1. 1) To maximize profits, a monopoly still produces where MR = MC. 3) To find the price, go up from Point A to the demand curve (Point B). 2) MR = MC at 4 units, but price is $4, not $1. MR A MC = ATC MR A Demand B MC = ATC Price Qty MC MR $8 - $7 1 $1 $6 2 $5 3 $3 $4 4 5 -$1 $2 6 -$3 7 -$5 $0 8 -$7

Profit Maximization in Monopoly Let’s assume a monopoly has no fixed costs and marginal cost is always $1. 1) To maximize profits, a monopoly still produces where MR = MC. 3) To find the price, go up from Point A to the demand curve (Point B). 2) MR = MC at 4 units, but price is $4, not $1. 4) Profit is the area of the rectangle. MR A Demand B MC = ATC Price Qty MC MR $8 - $7 1 $1 $6 2 $5 3 $3 $4 4 5 -$1 $2 6 -$3 7 -$5 $0 8 -$7 Profit = $3 x 4 = $12 Because marginal cost is flat, it is also the average total cost (ATC). If MC was not flat, ATC would be either above or below it, meaning that the rectangle used to calculate profits would be different. This is because we always calculate profit (the area of the rectangle) from the ATC, not the MC.

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures.

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly MR = P = D MC ATC MC = ATC D MR

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly Produces where MC = MR MR = P = D MC ATC MC = ATC D MR

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly 1) Charges equilibrium price 1) Charges higher price Produces where MC = MR MR = P = D MC ATC MC = ATC D MR

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly 1) Charges equilibrium price 1) Charges higher price 2) Produces equilibrium quantity 2) Produces smaller quantity Produces where MC = MR MR = P = D MC ATC MC = ATC D MR Equilibrium Quantity Point out that the equilibrium quantity in the monopoly market here is 7 units, but the firm will only produce 4 units.

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly 1) Charges equilibrium price 1) Charges higher price 2) Produces equilibrium quantity 2) Produces smaller quantity Produces where MC = MR 3) MR = Demand 3) MR < Demand MR = P = D MC ATC MC = ATC D MR MR, Price, and individual demand are all the same values in perfect competition. Under monopoly, these values are different because the demand curve is downward sloping.

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly 1) Charges equilibrium price 1) Charges higher price 2) Produces equilibrium quantity 2) Produces smaller quantity Produces where MC = MR 3) MR = Demand 3) MR < Demand 4) Price = MC at profit maximization 4) Price > MC at profit maximization MR = P = D MC ATC MC = ATC D MR Point out how the price charged under the monopoly is significantly higher than its red MC curve.

Perfect Competition vs. Monopoly Use the Venn Diagram below to compare these two market structures. Perfect Competition Monopoly 1) Charges equilibrium price 1) Charges higher price 2) Produces equilibrium quantity 2) Produces smaller quantity Produces where MC = MR 3) MR = Demand 3) MR < Demand 4) Price = MC at profit maximization 4) Price > MC at profit maximization 5) Earns no long run profit 5) Earns long run profit MR = P = D MC ATC MC = ATC D MR Although profits can be earned in the short run for both types of market structures (this can even be added to the purple section of the Venn Diagram if desired), entry into the market will eventually cause all profits to evaporate under perfect competition. Because monopolists can bar entry into their respective markets, profits can exist in the long run. Profit

Price Discrimination Price discrimination is the practice of charging different customers different prices for the exact same good or service.

Price Discrimination Price discrimination is the practice of charging different customers different prices for the exact same good or service. 1) Because monopolies charge a price above equilibrium, consumer surplus is smaller than normal. Point out that the purple region is much smaller on the bottom graph when compared to the top graph.

Price Discrimination Price discrimination is the practice of charging different customers different prices for the exact same good or service. 1) Because monopolies charge a price above equilibrium, consumer surplus is smaller than normal. 2) Some consumer surplus is captured as profits, and the rest is deadweight loss. Point out that the lost consumer surplus on the bottom graph has been either converted into monopoly profits or deadweight loss.

Price Discrimination Price discrimination is the practice of charging different customers different prices for the exact same good or service. 1) Because monopolies charge a price above equilibrium, consumer surplus is smaller than normal. 2) Some consumer surplus is captured as profits, and the rest is deadweight loss. 3) Price discrimination makes deadweight loss smaller by increasing profits. This is explained in detail on the next set of slides.

How Price Discrimination Works Price discrimination works by charging different prices to customers based on their elasticity of demand. MC = ATC D Suppose this is the market for tickets to a local high school football game.

How Price Discrimination Works Price discrimination works by charging different prices to customers based on their elasticity of demand. 1) People with inelastic demand are willing to pay higher prices. MC = ATC D Profit from Adults $1,000 Regular tickets--purchased by adults--may cost $6. Demand is inelastic since they want to see their child participate.

How Price Discrimination Works Price discrimination works by charging different prices to customers based on their elasticity of demand. 1) People with inelastic demand are willing to pay higher prices. MC = ATC D Consumer Surplus 2) High prices will chase away those with more elastic demand. Profit from Adults $1,000 Deadweight Loss $1,250 Notice the large deadweight loss. The wise monopolist will try to capture some of this.

How Price Discrimination Works Price discrimination works by charging different prices to customers based on their elasticity of demand. 1) People with inelastic demand are willing to pay higher prices. MC = ATC D Consumer Surplus 2) High prices will chase away those with more elastic demand. Profit from Adults $1,000 3) Monopolies can sell to those with elastic demand by charging a lower price to them. Profit from Students $600 DL $200 The elasticity of demand for a student is much more sensitive than an adult (more elastic) because the price of the ticket represents a large percentage of a student’s income. If there is a discounted price for students at $3, the school can make an additional $600 in profits.

How Price Discrimination Works Price discrimination works by charging different prices to customers based on their elasticity of demand. 1) People with inelastic demand are willing to pay higher prices. MC = ATC D Consumer Surplus 2) High prices will chase away those with more elastic demand. Profit from Adults $1,000 3) Monopolies can sell to those with elastic demand by charging a lower price to them. Profit from Students $600 DL $200 Another example is a senior citizen discount. All of these price discrimination practices can be enforced by using IDs or simply by looking at the person. Other prominent price discrimination examples are movie tickets and airline tickets. When a monopolist captures all consumer surplus and deadweight loss through price discrimination, it is called perfect price discrimination. Obviously, capturing every last penny is essentially impossible. 4) To be effective, these price differences must be enforceable. This price discrimination is enforced by having students show their IDs when buying the ticket.

Monopoly Profits DIRECTIONS Mark has written an app that allows students to easily keep track of their homework assignments. He is a single-price monopolist and has no fixed costs, but he must pay his Internet service provider $2 for every download. Use the table below to answer the following questions. This graph illustrates a market that is controlled by a single-price monopolist. There is no fixed cost, but the values for marginal cost, marginal revenue, and demand are drawn on the graph. Use the labeled points as a reference to answer the following questions. These are the directions for the Class Activity that is included in the download. You may differentiate instruction by using the three different versions, or you may decide to simply use just one version for the whole class.

“Monopoly” Learning Targets Knowledge 4 Understand the rationale and effects of price discrimination in a market controlled by a monopolist. Reasoning 6 Explain how a monopolist maximizes profits. Skill 2 Calculate marginal revenue, total revenue, and profit.

Resources