AP Microeconomics 12:2 Warm Up: What are the four main market structures? How would you describe the products in each one?

Perfect Competition & Monopoly Compared (1) Perfectly competitive firms are Price- _______________; which means And P = MR Monopoly firms are Price - _____________________; which means Therefore, P ≠ MR!! Having power in a market means firms can change price and still make profit! Firms can acquire power in imperfectly competitive markets if they can consistently price their goods in excess of marginal costs. TAKERS No one firm has price control in the market MAKERS The one firm is the only provider; total price control

Perfect Competition & Monopoly Compared (2) A perfectly competitive firm’s [output] demand curve is A perfectly competitive firm’s [output] supply curve is A monopoly firm has NO _________________ curve because they are both the industry and the firm. A monopoly firm’s ___________________ curve dictates the both the quantity supplied and demanded at each price. the constant MR curve; perfectly elastic the firm’s MC curve at all prices above the min. point on the AVC curve SUPPLY DEMAND

Perfect Competition & Monopoly Compared (3) The demand curve of firms in both monopolies and perfect competition are (4) Marginal cost curves and average cost curves are the same shape in both market structures: (5) The optimal level of production for ALL firms occurs when MR = MC. dDwnward sloping To find Q (output) always look for

Monopoly Power 1.Market Share Measured by the Herfindahl Index This measures the size of firms in relationship to the industry and an indicator of the amount of competition among them 2. Pricing Measured by the Lerner Index Describes a monopoly’s price power L = (P – MC) P The greater the value, the greater the price power. In perfect competition, where P = MC, Lerner index is zero; no market power. 2 Forms: ways to measure a firm’s power

Monopolies Monopoly demand curves are downward sloping. In order to increase sales the monopolist must lower it’s price. P>MR and a pricing strategy ensues. If the product is elastic the monopolist will lower price to increase total revenue If the product is inelastic the monopolist will raise price to increase total revenue

MONOPOLY REVENUES & COSTS Quantity of Output Price (average revenue) Total Revenue Marginal Revenue Average Total Cost Total CostMarginal Cost Profit + Or Loss - 0$172$0 -- $ $

MONOPOLY REVENUES & COSTS Quantity of Output Price (average revenue) Total Revenue Marginal Revenue Average Total Cost Total CostMarginal Cost Profit + Or Loss - 0$172$0 -- $ $162$

MONOPOLY REVENUES & COSTS Quantity of Output Price (average revenue) Total Revenue Marginal Revenue Average Total Cost Total CostMarginal Cost Profit + Or Loss - 0$172$0 -- $ $162$ $

MONOPOLY REVENUES & COSTS Quantity of Output Price (average revenue) Total Revenue Marginal Revenue Average Total Cost Total CostMarginal Cost Profit + Or Loss - 0$172$0 -- $ $ $162$ $

MONOPOLY REVENUES & COSTS Dollars $ $ Q Q

MONOPOLY REVENUES & COSTS Dollars $ $ MR Elastic D Q TR Q

MONOPOLY REVENUES & COSTS Q Dollars $ $ TR MR D InelasticElastic Q

How Do Monopolists Determine Profit? Price & Cost Quantity Demand MR MC ATC Find Where MC = MR to determine quantity QXQX Go to the demand curve to find the price PXPX Go to ATC to find cost. The difference is Profit/Loss Profit Downward sloping demand curve, whatever is demanded the monopolist will supply The MR curve should hit the x- axis at the demand curves Mid-Point

How do Monopolists Determine Profit? Look For: #1: Where MC = MR (optimal point of production, therefore quantity supplied) #2: That quantities intersection with both the demand curve and ATC curve #3: Price on Demand Curve & Price on ATC curve Monopolists realize profits and set price where MC = MR and P > MR!!!

Contrasts to Perfect Competition 1.Output is restricted 2.Price is higher 3.Output is lower, which leads to: 4.Misallocation of resources

Contrasts to Perfect Competition 5.Reduction of Consumer Surplus {Review of Consumer Surplus: marginal utility is greater than price and people who are willing to pay higher than the market price for a good “save” money} Looks Like: Price Quantity S D PXPX Consumer Surplus Producer Surplus

Contrasts to Perfect Competition 7. Creates dead-weight loss

Q D MR MC ATC P Q1Q1 Price and Costs P1P1 Profit Consumer Surplus DWL Dead weight loss; monopolists do not have to conserve resources!! They have no competition Costs

Therefore, Monopolies are powerful but are likely to show inefficiencies!!! Q D MR MC ATC P Price and Costs MR = MC Monopolists Price Fair-Return Price Normal Profit Only Socially-Optimum Price QmQm QfQf QsQs PmPm PfPf PsPs Dilemma of Regulation: Which Price?

Is there a need for government to regulate this market structure?

Allocative Efficiency When the market produces a level of output where the Marginal Cost (MC) is equal to the selling Price. A Perfectly Competitive market has allocative efficiency. Monopolistically Competitive and Monopolies are not allocative efficient.

Productive Efficiency At the profit maximizing quantity Price equals ATC A Perfectly Competitive market has productive efficiency. Monopolistically Competitive and Monopolies are not productive efficient

Price Discrimination The selling of the same good at different prices to different consumers. Price Discrimination is possible if three conditions exist –Firm has monopoly pricing power –Firm can identify and separate groups of consumers –Firm can prevent the resale between consumers

Examples of Price Discrimination Child and Senior discounts at the movie theatre or restaurants Airline tickets bought three weeks in advance compared to one bought an hour in advance Coupons People who buy things in bulk. Sam’s Club

Government Regulation of Monopolies 1. Break up the Monopoly Ex: AT&T was broken up by the government into smaller companies 2. Regulate the Price Ex: BGE had it’s price limited by the government 3. Government takes ownership of the company