Unit 4: Imperfect Competition 1

D MR $ MC ATC Q P How much is the TR, TC and Profit or Loss? Profit =$20 Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve.

Elastic and Inelastic Range 3 Q $ $ TR D Q MR P TR Total Revenue Test If price falls and TR increases then demand is elastic. Elastic Total Revenue Test If price falls and TR falls then demand is inelastic. A monopoly will only produce in the elastic range Inelastic

Are Monopolies Efficient? 4

Monopolies are inefficient because they… 1.Charge a higher price 2.Don’t produce enough Not allocatively efficiency 3.Produce at higher costs Not productively efficiency 4.Have little incentive to innovate Why? Because there is little external pressure to be efficient 5

Where is CS and PS for a monopoly? 6 Monopolies vs. Perfect Competition Q P D S = MC MR PmPm QmQm CS PS Total surplus falls. Now there is DEADWEIGHT LOSS

Regulating Monopolies 7

How do they regulate? Use Price controls: Price Ceilings Why don’t taxes work? Taxes limit supply and that’s the problem Why Regulate? Why would the government regulate an monopoly? 1.To keep prices low 2.To make monopolies efficient 8

1.Socially Optimal Price P = MC (Allocative Efficiency) Where should the government place the price ceiling? 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit) OR 9

D MR MC ATC 10 Q P Regulating Monopolies Where does the firm produce if it is unregulated? PmPm QmQm

D MR MC ATC 11 Q P Regulating Monopolies Price Ceiling at Socially Optimal PmPm QmQm P so Q so Socially Optimal = Allocative Efficiency

D MR MC ATC 12 Q P Regulating Monopolies Price Ceiling at Fair Return PmPm QmQm P so Q so Fair Return means no economic profit P fr Q fr

D MR MC ATC 13 Q P Regulating Monopolies PmPm QmQm P so Q so Unregulated P fr Q fr Socially Optimal Fair Return

Q DMR MC ATC P Regulating a Natural Monopoly 14 Q socially optimal What happens if the government sets a price ceiling to get the socially optimal quantity? The firm would make a loss and would require a subsidy P so

Price Discrimination 15

Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Airline Tickets (vacation vs. business) Movie Theaters (child vs. adult) All Coupons (spenders vs. savers) FHS football games (students vs. parents) Examples: 16

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 Requires the following conditions: 1.Must have monopoly power 2.Must be able to segregate the market 3.Consumers must NOT be able to resell product 17

PQdTRMR $

$10 PQdTRMR $1100- $10110 Results of Price Discrimination 19

$10 PQdTRMR $1100- $10110 $92199 $10$9 Results of Price Discrimination 20

$10 PQdTRMR $1100- $10110 $92199 $83278 $10$9 $10$9$8 Results of Price Discrimination 21

$10 PQdTRMR $1100- $10110 $92199 $83278 $74347 $10$9 $10$9$8 $10$9$8$7 Results of Price Discrimination 22

$10 PQdTRMR $1100- $10110 $9219$9 $8327$8 $7434$7 $6540$6 $5645$5 $4749$4 Results of Price Discrimination $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4 23

$10 PQdTRMR $1100- $10110 $9219$9 $8327$8 $7434$7 $6540$6 $5645$5 $4749$4 $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4 WHEN PRICE DISCIMINATING MR = D 24

Regular Monopoly vs. Price Discriminating Monopoly 25 D MR MC ATC Q P PmPm QmQm

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand 26 D MR MC ATC Q P

27 D=MR MC ATC Q P Q nm Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

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

Can You Do The Following? 1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 29