Unit 4: Imperfect Competition 1 Copyright ACDC Leadership 2015

REVIEW ACTIVITY Name That Concept Rules: 1. Cannot use the word(s) 2. Focus on the concept not word Ex: Price Maker 2 Copyright ACDC Leadership 2015

Name That Concept 1. Monopoly 2. Imperfect Competition 3. Barriers to Entry 4. Dead Weight Loss 5. Productive Efficiency 3 Copyright ACDC Leadership 2015

Name That Concept 1. Marginal Revenue 2. MR = MC 3. Shut down rule 4. Natural Monopoly 5. Allocative Efficiency 4 Copyright ACDC Leadership 2015

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. Copyright ACDC Leadership 2015

Elastic and Inelastic Range 6 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 Copyright ACDC Leadership 2015

Regulating Monopolies 7 Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

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

Q D MC ATC P Natural Monopoly 11 Q socially optimal Copyright ACDC Leadership 2015 Unregulated Socially Optimal (No DWL) Fair Return QMQM Q FR PMPM P FR Q SO

Q D MC ATC P Regulating a Natural Monopoly 12 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 Copyright ACDC Leadership 2015 MR

2008 Audit Exam

Perfect Price Discrimination 14 Copyright ACDC Leadership 2015

Price Discrimination Price Discrimination: 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) SPHS football games (students vs. parents) Examples: 15 Copyright ACDC Leadership 2015

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 16 Copyright ACDC Leadership 2015 Price Discrimination

PQdTRMR $ Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 Results of Price Discrimination 18 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92199 $10$9 Results of Price Discrimination 19 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92199 $83278 $10$9 $10$9$8 Results of Price Discrimination 20 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92199 $83278 $74347 $10$9 $10$9$8 $10$9$8$7 Results of Price Discrimination 21 Copyright ACDC Leadership 2015

$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 22 Copyright ACDC Leadership 2015

$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 23 Copyright ACDC Leadership 2015

Regular Monopoly vs. Price Discriminating Monopoly 24 D MR MC ATC Q P PmPm QmQm Copyright ACDC Leadership 2015

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

26 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 Copyright ACDC Leadership 2015

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 Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity 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. 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 28 Copyright ACDC Leadership 2015