1. One Seller 2. One Product 4. Non-Price competition 6. Price Maker (to maximize profits) 3. Blocked Entry (and exit?) 5. LR profits/losses

Barriers to Entry 1.economies of scale 2.government licensing 3.Patents 4. control over an essential resource

d MR MC LRATC Price Quantity/time The diagram shows demand and long-run cost conditions in an industry a.Explain why the industry is likely to be monopolized. b.Indicate the monopolist’s output level, and label it Q. c.Indicate the price that a profit-maximizing monopolist would charge, and label it P d.Indicate the maximum profits of the monopolist. e. Will the profits attract competitors to the industry? Yes ___ No ____ Explain why or why not Name: ____________________

Price Quantity/time d P MR q MC ATC C B A with price determined by the height of the demand curve at that level of output, P. Price and Output Under Monopoly Expand output as long as MR > MC. (P goes down) MR > MC MR < MC Output level q will result … At q the average total cost per unit for that scale of output is C. As P > C (price > ATC) the firm is making economic profits equal to the area PABC. Economic profits

Total revenue = (1)*(2) (3) Price (per unit) (2) Output (per day) (1) 1 $ $50.00 Total costs (per day) (4) Profit = (3) - (4) (5) Marginal cost (6) Marginal revenue (7) $24.00 $23.00 $22.00 $21.00 $19.75 $18.50 $17.25 $16.00 $14.75 $25.00 $48.00 $69.00 $88.00 $ $ $ $ $ $ $60.00 $69.00 $77.00 $84.00 $90.50 $96.75 $ $ $ $ $ $ $8.00 $4.00 $14.50 $21.75 $26.75 $29.50 $29.25 $ $ $10.00$25.00 $9.00$23.00 $8.00$21.00 $7.00$19.00 $6.50$17.00 $6.25$13.50 $6.00$11.00 $5.75$8.50 $6.25$6.00 $6.50$ < < < < < < < < Maximum profits A monopolist will reduce price and expand output as long as MR > MC. Price and Output Under Monopoly As the monopolist reduces price and expands output, profits increase … until the point where MC > MR. Here an output of 8 a day will maximize profits.

Number of Cakes

Profits Under Monopoly High entry barriers protect monopolists from competitive pressures. –Monopolists can earn long-run profits. However even a monopolist will not always be able to earn profit. –When ATC is always above the demand curve, the monopolist will be unable to cover costs (unable to earn a profit).

A monopolist will set output equal to q, where MR = MC When a Monopolist Incurs Losses d P MR q MC ATC C A B Price Quantity/time Short-run losses At this level of output, the price that the monopolist charges does not cover the average total cost of producing the output ( P < C ). Whenever the ATC curve lies always above the demand curve, the monopolist will incur short-run losses. In this diagram the firm is making economic losses equal to the shaded area, CABP.

D P0P0 MR Q0Q0 LRATC MC P1P1 P2P2 Q1Q1 Q2Q2 Regulation of a Monopolist Price Quantity/time An unregulated monopolist produces where MR = MC (Q 0 ) and charge price P 0. From an efficiency viewpoint, this output is too small and the price is too high. 1.average cost pricing The monopolist is forced to reduce its price to P 1 the expand output to Q marginal cost pricing -Force output to be expanded to Q 2 where P = MC - P = cost to produce -Forces LR losses. Average cost pricing Marginal cost pricing

1. Few Sellers 2. Differentiated or Identical Products Characteristics? 4. Non-Price competition 6. Price Maker 3. Difficult Entry and Exit 5. LR profits/losses

D AB C high low $57 $55 $60 $59 $50 $69$58

price quantity D=AR Current Price and Quantity MR elastic inelastic P TR MC 1 MC 2 MC 3 Q P

a. Formal Agreement to set Prices b. OPEC 1. Overt Collusion a. Secret agreements 2. Covert Collusion b. Electric switch makers in the 50s

a. Agree on price then use non- price competition b. Types of agreements 3. Gentlemen’s Agreements 2) Cost-Plus Pricing 1) Price Leadership - GM - Set price based on ATC at 85% capacity -dominant firm set price -others follow

2. Firms may cheat in non-price ways – free services 3. Requires barriers to remain high 1. More firms, more likely to cheat 5. Illegal - use Gentlemen’s agreements 4. Unstable demand/business cycles 6. Difficult to hold the price

When economies of scale are important and an industry tends toward natural monopoly, splitting the industry into small, rival firms will a. lead to lower prices in the short run. b. cause prices to rise when demand is inelastic but fall when it is elastic. c. cause prices to fall because of the decline in producer profits. d. increase per-unit costs of production. Which of the following is the most accurate description of a monopolist? a.a firm that produces a single product b.a firm that is the sole producer of a narrowly defined product class, such as yellow, grade-A butter produced in Jackson County, Wisconsin c.a firm that is the sole producer of a product for which there are no good substitutes in a market with high barriers to entry d.a firm that is large relative to its competitors A monopolist will maximize profits by a. setting his price as high as possible. b. setting his price at the level that will maximize per-unit profit. c.producing the output where marginal revenue equals marginal cost and charging the price on the demand curve at that quantity. d.producing the output where price equals marginal cost.

The incentive for the managers of a government-operated firm (for example, a state university) to promote internal efficiency and keep costs low will be a. weak because it will be difficult for voters and their representatives to monitor and eliminate the inefficiency of such firms. b. strong because public officials will have little concern for personal gain. c.strong because voters can easily recognize inefficiency and penalize the public- sector managers who are responsible. d.weak because government employees are less competent than those who work in the private sector. Oligopolistic agreements on price tend to be unstable because a.although the monopoly price is the best price for all firms, oligopolists are unaware of this. b.although the monopoly price maximizes the joint profits of the firms, a secret price cut by any individual firm will increase the profits of that firm; hence, collusive agreements tend to break down. c.the demand for the products of oligopolistic industries is inherently unstable relative to the demand for the products of non-oligopolistic industries. d.firms in oligopolistic industries have more concern for consumers than do firms in competitive industries. When firms use resources in an attempt to secure and maintain grants of market protection from the government, it is called a. rent seekingb. franchising. c. collusion.d. resource investment

What price and output in the graph would an unregulated profit- maximizing monopolist choose? a. price C and output R b. price B and output R c.price B and output S d.price A and output T If a regulatory agency were using the “normal return” (zero economic profit) criteria to impose a price on a monopolist with the cost and demand conditions depicted, what price would the regulators set, and what output would the monopolist produce? a.price A and output T b.price C and output R c.price B and output R d. price B and output S Would they be making a profit? a. yes b. no c.normal but not economic d.can’t tell