Unit 4: Imperfect Competition

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

Imperfect Competition Barriers to Entry Dead Weight Loss Name That Concept Monopoly Imperfect Competition Barriers to Entry Dead Weight Loss Productive Efficiency

Allocative Efficiency Name That Concept Marginal Revenue MR = MC Shut down rule Natural Monopoly Allocative Efficiency

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

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

Are Monopolies Efficient?

Because there is little external pressure to be efficient Monopolies are inefficient because they… Charge a higher price Don’t produce enough Not allocatively efficiency Produce at higher costs Not productively efficiency Have little incentive to innovate Why? Because there is little external pressure to be efficient 8

Monopolies vs. Perfect Competition Where is CS and PS for a monopoly? S = MC P CS Total surplus falls. Now there is DEADWEIGHT LOSS Pm PS D MR Q Qm 9

Regulating Monopolies

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

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)

Regulating Monopolies Where does the firm produce if it is unregulated? P MC Pm ATC D MR Q Qm 13

Regulating Monopolies Price Ceiling at Socially Optimal Socially Optimal = Allocative Efficiency P MC Pm ATC Pso D MR Q Qm Qso 14

Regulating Monopolies Price Ceiling at Fair Return Fair Return means no economic profit P MC Pm ATC Pso Pfr D MR Q Qm Qso Qfr 15

Regulating Monopolies Unregulated Socially Optimal P MC Fair Return Pm ATC Pso Pfr D MR Q Qm Qso Qfr 16

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 17

Price Discrimination

Price Discrimination Definition: 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)

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

P Qd TR MR $11 -

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $10

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $10 $10 $9

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

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

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

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

Price Discriminating Monopoly Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Q Qm

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MC ATC D MR Q 29

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 30

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 31

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