Unit 4: Imperfect Competition Copyright ACDC Leadership 2015

REVIEW ACTIVITY Name That Concept Rules: Cannot use the word(s) Focus on the concept not word Ex: Price Maker Copyright ACDC Leadership 2015

Imperfect Competition Barriers to Entry Dead Weight Loss Name That Concept Monopoly Imperfect Competition Barriers to Entry Dead Weight Loss Productive Efficiency Copyright ACDC Leadership 2015

Allocative Efficiency Name That Concept Marginal Revenue MR = MC Shut down rule Natural Monopoly Allocative Efficiency Copyright ACDC Leadership 2015

How much is the TR, TC and Profit or Loss? Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve. How much is the TR, TC and Profit or Loss? P $10 9 8 7 6 5 MC ATC Profit =$20 D MR Q 16 17 18 19 20 5 Copyright ACDC Leadership 2015

Elastic and Inelastic Range P Elastic Inelastic $15 10 5 Total Revenue Test If price falls and TR increases then demand is elastic. D Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR A monopoly will only produce in the elastic range MR $64 40 20 Total Revenue Test If price falls and TR falls then demand is inelastic. TR Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 6 Copyright ACDC Leadership 2015

Regulating Monopolies Copyright ACDC Leadership 2015

Why Regulate? How do they regulate? Why would the government regulate an monopoly? To keep prices low To make monopolies efficient How do they regulate? Use Price controls: Price Ceilings Why don’t taxes work? Taxes limit supply and that’s the problem Copyright ACDC Leadership 2015

Where should the government place the price ceiling? 1.Socially Optimal Price P = MC (Allocative Efficiency) OR 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit) Copyright ACDC Leadership 2015

Natural Monopoly One firm can produce the socially optimal quantity at the lowest cost due to economies scale. P It is better to have only one firm because ATC is falling at socially optimal quantity MC ATC MR D Q Qsocially optimal 10 Copyright ACDC Leadership 2015

Natural Monopoly Unregulated Fair Return Socially Optimal (No DWL) P PM MC PFR ATC QSO MR D Q QM QFR Qsocially optimal 11 Copyright ACDC Leadership 2015

Regulating a Natural Monopoly What happens if the government sets a price ceiling to get the socially optimal quantity? P The firm would make a loss and would require a subsidy MC ATC Pso MR D Q Qsocially optimal 12 Copyright ACDC Leadership 2015

2008 Audit Exam 40. D

Perfect Price Discrimination Copyright ACDC Leadership 2015

Price Discrimination Price Discrimination: Practice of selling the same products to different buyers at different prices Examples: Airline Tickets (vacation vs. business) Movie Theaters (child vs. adult) All Coupons (spenders vs. savers) SPHS football games (students vs. parents) Copyright ACDC Leadership 2015

Price Discrimination Requires the following conditions: Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. Those with inelastic demand are charged more than those with elastic Requires the following conditions: Must have monopoly power Must be able to segregate the market Consumers must NOT be able to resell product Copyright ACDC Leadership 2015

P Qd TR MR $11 - Copyright ACDC Leadership 2015

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $10 Copyright ACDC Leadership 2015

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $10 $10 $9 Copyright ACDC Leadership 2015

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $10 $10 $9 $10 $9 $8 Copyright ACDC Leadership 2015

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $7 4 34 7 $10 $10 $9 $10 $9 $8 $10 $9 $8 $7 Copyright ACDC Leadership 2015

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49 $10 $10 $9 $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4 Copyright ACDC Leadership 2015

WHEN PRICE DISCIMINATING Qd TR MR $11 - $10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49 $10 $10 $9 WHEN PRICE DISCIMINATING MR = D $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4 Copyright ACDC Leadership 2015

Price Discriminating Monopoly Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Q Qm Copyright ACDC Leadership 2015

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MC ATC D MR Q 25 Copyright ACDC Leadership 2015

Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Q Qnm 26 Copyright ACDC Leadership 2015

Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC Many prices More profit D =MR Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Q Qnm 27 Copyright ACDC Leadership 2015

Can You Do The Following? 1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit Copyright ACDC Leadership 2015