Don’t Write On Desks

Major Monopoly Rules Changes 3) When a question is answered someone from the group must explain why the answer is correct. You can ask Mr. Golden for help if needed 4) Bonus cards can be played by owner when applicable. Make one chance and community chest space – a bonus card space. 5)Ignore that you start with different amounts of money. We’ll get to that part next class 1) The Banker is a player and owns properties and bonus cards. The banker sets prices for all at beginning of game and is competing with other bankers 2) To buy a property you must get a questions correct. Bonus cards help. If incorrect the other players can then try to get it right. If more than one player wants the property it is auctioned off.

Monopoly- more than just a game 1)What is a monopoly 2) How do monopolies affect the marketplace? 3) How do monopolies affect you, the consumer? 4) What are examples of Monopolies that you know of? One company has entire market share No other options for consumers Create the supply Control the product Higher Prices Less Quantity Creates inefficiency US Postal Service, Parking Meter, Tap Water, Exxon-Mobile, Com Ed, GE, CTA

Monopoly- more than just a game Monopolies are a source of inefficiency in the marketplace Monopolies can be argued to be a source of inequity Monopolies cause higher prices for consumers Examples-Diamonds, Cell Phones

Demand for Class How many of you would pay? In perfect competition what is demand for the firm? But I was a monopolist, what is the demand for me? Demand for a monopolist is the industry market demand

Perfect Competition Revisted 1) No Barriers to Entry 2) No one firm has any control of the market share 3) Firms and Consumers are both price takers

Comparing the Demand Curves of a Perfectly Competitive Firm and a Monopolist

Imperfect Competition 8

Characteristics of Monopolies 9

Take five minutes to come up with answers to these questions- have someone record for your table 1) What are the characteristic of a monopoly? 2) What are examples of monopolies that you know of? 3) How can a company become a monopoly? 4) How do monopolies affect you? Society? Are they good? Bad?

5 Characteristics of a Monopoly Single Seller One Firm controls the vast majority of a market The Firm IS the Industry This doesn’t happen often, a true monopoly is rare 2. Unique good with no close substitutes 11

5 Characteristics of a Monopoly 3. “Price Maker” The firm can manipulate the price by changing the quantity it produces (ie. shifting the supply curve to the left). Ex: DeBeers Diamonds 12

5 Characteristics of a Monopoly 4. High Barriers to Entry New firms CANNOT enter market No immediate competitors Firm can make profit in the long-run 13

5 Characteristics of a Monopoly AT&T Commercial 5. Some “Nonprice” Competition Despite having no close competitors, monopolies still advertise their products in an effort to increase demand. 14

Examples of Monopolies 15

Four Origins of Monopolies Geography is the Barrier to Entry Ex: Nowhere gas stations, De Beers Diamonds, Chicago Bulls, Cable TV, -Location or control of resources limits competition and leads to one supplier. 16

Four Origins of Monopolies 2. The Government is the Barrier to Entry Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubix cubes… -Government allows monopoly for public benefits (water company) or to stimulate innovation (patents). -The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years) 17

Four Origins of Monopolies 3. Technology or Common Use is the Barrier to Entry Ex: Microsoft, Frisbee, Itunes, Band-Aide… -Patents and widespread availability of certain products lead to only one major firm controlling a market. 18

Four Origins of Monopolies 4. Mass Production and Low Costs are Barriers to Entry Ex: Electric Companies If there were three competing electric companies they would have higher costs. Having only one electric company keeps prices low -Economies of scale make it impractical to have smaller firms. Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost. 19

Economies of Scale Create Natural Monopoly

Drawing Monopolies 21

Good news… Only one graph because the firm IS the industry. The cost curves are the same The MR= MC rule still applies Shut down rule still applies 22

THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE! The Main Difference Monopolies (and all Imperfectly competitive firms) have downward sloping demand curve. Which means, to sell more a firm must lower its price. This changes MR… THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE! 23

Why is MR less than Demand? P Qd TR MR $11 - 24

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $10 25

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $10 $9 $9 26

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $10 $9 $9 $8 $8 $8 27

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 28

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 29

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 30

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2 $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 31

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2 $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 32

Why is MR less than Demand? P Qd TR MR $11 - $10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2 $10 $9 $9 MR IS LESS THAN PRICE $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 33

Calculating Marginal Revenue 34

Does the Marginal Revenue equal the price? To sell more a firm must lower its price. What happens to Marginal Revenue? Price Quantity Demanded Total Revenue Marginal Revenue $6 $5 1 $4 2 $3 3 $2 4 $1 5 Does the Marginal Revenue equal the price? 35

Does the Marginal Revenue equal the price? To sell more a firm must lower its price. What happens to Marginal Revenue? Price Quantity Demanded Total Revenue Marginal Revenue $6 $5 1 5 $4 2 8 $3 3 9 $2 4 $1 Does the Marginal Revenue equal the price? 36

Draw Demand and Marginal Revenue Curves To sell more a firm must lower its price. What happens to Marginal Revenue? Price Quantity Demanded Total Revenue Marginal Revenue $6 - $5 1 5 $4 2 8 3 $3 9 $2 4 -1 $1 -3 MR DOESN’T EQUAL PRICE Draw Demand and Marginal Revenue Curves 37

Plot the Demand, Marginal Revenue, and Total Revenue Curves $15 10 5 P Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR $64 40 20 Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 38

Demand and Marginal Revenue Curves What happens to TR when MR hits zero? $15 10 5 P D Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR MR $64 40 20 Total Revenue is at it’s peak when MR hits zero TR Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 39

Elastic vs. Inelastic Range of Demand Curve 40

Elastic and Inelastic Range P Elastic Inelastic $15 10 5 Total Revenue Test If price falls and TR increases then demand is elastic. D Total Revenue Test If price falls and TR falls then demand is inelastic. Total Revenue is maximized when Marginal Revenue is Zero Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR MR $64 40 20 TR Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 41

A monopoly will only produce in the elastic range

Maximizing Profit 1)How much should a monopolist produce Maximizing Profit 1)How much should a monopolist produce? 2) What does a monopolist charge? 43

MR = MC What output should this monopoly produce? How much is the TR, TC and Profit or Loss? $9 8 7 6 5 4 3 2 P MC ATC Profit =$5 D MR Q 1 2 3 4 5 6 7 8 9 10 44

Conclusion: A monopolists produces where MR=MC, buts charges the price consumer are willing to pay identified by the demand curve. $9 8 7 6 5 4 3 2 P MC ATC D MR Q 1 2 3 4 5 6 7 8 9 10 45

How much is the TR, TC, and Profit or Loss? What if cost are higher? How much is the TR, TC, and Profit or Loss? MC $10 9 8 7 6 5 4 3 P ATC AVC D TR= $90 TC= $100 Loss=$10 MR Q 6 7 8 9 10 46

Review Questions How does the demand curve differ between a monopolist and a firm In perfect competition? 2) What are the defining characteristics of a monopoly? High Barriers to Entry, Monopoly is industry, Price Setter, Unique 3) What are reasons a monopoly can occur? Technology, Geography, Government, Mergers, Patent What is a natural monopoly? Com Ed, efficient, high infrastructure Economies of scale 5) What is the relationship between demand and marginal revenue for a monopoly? 6) What part of the demand curve will a monopoly produce at, elastic or inelastic?

Review Questions What is a natural monopoly? What is the relationship between demand and marginal revenue for a monopoly? 6) What part of the demand curve will a monopoly produce at, elastic or inelastic?

Identify and Calculate: TR= TC= Profit/Loss= Profit/Loss per Unit= $70 Identify and Calculate: $56 $14 $2 P $10 9 8 7 6 5 4 MC ATC D MR 1 2 3 4 5 6 7 8 9 10 Q 49

Are Monopolies Efficient? 50

Monopolies vs. Perfect Competition S = MC P CS In perfect competition, CS and PS are maximized. Ppc PS D Q Qpc 51

Monopolies vs. Perfect Competition S = MC P At MR=MC, A monopolist will produce less and charge a higher price Pm Ppc D MR Q Qm Qpc 52

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 Monopolies underproduce and over charge, decreasing CS and increasing PS. D MR Q Qm 53

Are Monopolies Productively Efficient? No. They are not producing at the lowest cost (min ATC) Does Price = Min ATC? $9 8 7 6 5 4 3 2 P MC ATC D MR Q 1 2 3 4 5 6 7 8 9 10 54

Monopolies are NOT efficient! Are Monopolies Allocatively Efficiency? No. Price is greater. The monopoly is under producing. Does Price = MC? $9 8 7 6 5 4 3 2 P MC ATC Monopolies are NOT efficient! D MR Q 1 2 3 4 5 6 7 8 9 10 55

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 56

Regulating Monopolies 57

What should be regulated? 1) Local Cable 2) Local Electric 3) Local Trash Service 4) Diamonds 5) The nearest theme park 6) Phone Service Consider which are natural monopolies? Would regulation give incentive to the firm to innovate? Would regulation protect consumers?

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 59

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) 60

Regulating Monopolies Where does the firm produce if it is unregulated? P MC Pm ATC D MR Q Qm 61

Regulating Monopolies Price Ceiling at Socially Optimal Socially Optimal = Allocative Efficiency P MC Pm ATC Pso D MR Q Qm Qso 62

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 63

Regulating Monopolies Unregulated Socially Optimal P MC Fair Return Pm ATC Pso Pfr D MR Q Qm Qso Qfr 64

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 65

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 Pso ATC MR D Q Qsocially optimal 66

Price Discrimination 67

Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Examples: Airline Tickets (vacation vs. business, purchasing in advance vs. the day before) Movie Theaters (child vs. adult) All Coupons (spenders vs. savers) 68

PRICE DISCRIMINATION 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 69

PRICE DISCRIMINATION Requires the following conditions: Must have some form of monopoly power Must be able to segregate the market Consumers must NOT be able to resell product (Cannot always be controlled i.e. scalping 70

P Qd TR MR $11 - 71

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $10 72

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $10 $10 $9 73

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 74

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 75

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 76

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 77

Price Discriminating Monopoly Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Q Qm 78

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MC ATC D MR Q 79

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 80

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 81

Why charge a higher rate for popcorn? Which is better for the movie theater? Ticket $15, Popcorn $5 Ticket- $11, Popcorn $9 Both equal $20 total Is this price discrimination, or just a close pricing scheme?

What knowledge does a monopolist require to Price Discrimination? How would you Price Discriminate? 1) High School Sporting Events 2) Student Fundraisers (Art Sale, Bake Sale, Pizza Sale) 3) School Parking Lot (Premium Spaces, Remote Spaces) 4) Online Gaming/Television subscriptions 5) Iphone/Android Games with in-app purchases- Candy Crush/ Jetpack Joy Ride/ Angry Birds 6) Think of your own good or service where price discrimination is beneficial.

Let’s Review Factors Factors- Machines, Labor – continuous input. Wage rate set by labor supply and demand Firms and employees are wage takers, not wage setters. Marginal Resource Cost- Cost of an additional worker Marginal Revenue Product- the additional revenue created by the additional worker (Price of product times Marginal Product of Labor

Let’s Review Factors A firm will produce until MRP=MRC In Perfect Competition: MRP=Demand MRC=Supply

Side-by-side graph showing Market and Firm SL Wage Wage SL=MRC WE DL=MRP DL Q Qe Q QE Industry Firm

Monopsony One buyer of labor When does this occur? Their supply curve is the industry supply curve. One firm is now a wage setter (factor cost setter) instead of wage taker (factor cost taker)

Examples of Monopsony Mining Companies in mining towns The US Military Walmart in small towns?

Wage Qs 4 0 5 1 6 2 7 3 8 4 $ S 8 7 6 5 1 2 3 4 L In this example the suppliers of labor will supply a q of 1 when the wage is 5, and so on.

Meaning the employer can gain additional workers at additional cost. Wage Qs TRC MRC 4 0 0 xxx 5 1 5 5 6 2 12 7 7 3 21 9 8 4 32 11 $ MRC S 8 7 6 5 1 2 3 4 E Marginal Resource (labor) Cost is now different than labor supply , it’s higher! Meaning the employer can gain additional workers at additional cost. The employer can choose the wage rate!

Where would a monopsony produce Quantity-MRP=MRC But what would people be willing to work at that quantity The monopsonist will move down to the supply curve- hiring fewer people at a lower wage – creating deadweight.