1. Economics 3/27/17 http://mrmilewski.com
OBJECTIVE: Examine Pure Monopoly. AP Micro-4.1
Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective.
I. Daily Opener#62
-ACDC Econ Micro 4.2 Monopoly Graph
-ACDC Econ Micro 4.3 Monopoly Dead Weight Loss
-ACDC Econ Micro 4.7 Monopoly Graph & Review
II. Notes#62
-notes monopoly
Homework: Ch#10 Questions (1-6) & Problems (1-2) p

2. 10
Pure Monopoly
This chapter is divided into six basic sections: the characteristics of pure monopoly, the barriers to entry that create and protect monopolies, price and output determination under monopoly, the economic effects of monopoly, price discrimination under monopoly, and the regulation of monopolies.
The discussion of barriers to entry states at the outset that these barriers may occur to some extent in any form of imperfect competition, not just in a pure monopoly. The concept of a natural monopoly is addressed in this section.
Building on the analysis of the preceding chapter, the discussion of the price‑output decision-making by monopoly firms points out that the marginal-revenue—marginal-cost rule still applies. Emphasis here is on the major difference between the determination of marginal revenue in pure competition and in pure monopoly. The misconceptions about monopoly pricing behavior are presented, as well as a comparison of efficiency in pure competition and pure monopoly. This section ends with a discussion of the effects of monopoly power in the U.S. economy and some policy alternatives.
The case of price discrimination and its effects are discussed along with the conditions necessary for it to occur. At the end of the chapter, the basic issues involved in the regulation of public service monopolies are reviewed.
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

3. Monopoly Demand The pure monopolist is the industry
The demand curve is the market demand curve, also.
The difference between a pure competitor and a pure monopolist is on the demand side.
Instead of a purely elastic demand curve like pure competition, it is a down-sloping demand curve.
The following analysis of monopoly demand makes three assumptions:
1.The monopoly is secured by patents, economies of scale, or resource ownership.
2.The firm is not regulated by any unit of government.
3.The firm is a single‑price monopolist; it charges the same price for all units of output.
10-3
LO1

4. Marginal Revenue is Less Than Price
Marginal revenue is less than price – The only way for a monopolist to increase sales is by charging a lower price. But by doing so, they forgoe the revenue from the higher price.
For example: If a monopolist is selling a product at $100 and then lowered the price to $90 to sell additional units, they would lose $10/unit in marginal revenue. If they sold 5 units their revenue would be $450, but had it been at the original price, they would have earned $500. The next unit they sell will actually generate a revenue of $40.($90 less the $50 forgone on the first five units sold) So, clearly, marginal revenue is less than price.

5. Price (Average Revenue)
Monopoly Demand
Table 10.1 Revenue and Cost Data of a Pure Monopolist
Revenue Data
Cost Data
(1) Quantity of Output
(2)
Price (Average Revenue)
(3)
Total Revenue
(1) X (2)
(4) Marginal Revenue
(5)
Average Total Cost
(6)
Total Cost
(1) X (5)
(7)
Marginal Cost
(8)
Profit (+) or
Loss (-)
$ 172 $0
$ 100
$ -100 1
162
$ 162 $
190
$ 90
-28 2
152
304
142
135.00
270 80
+34 3
426
122
113.33
340 70
+86 4
132
528
102
100.00
400 60
+128 5
610 82
94.00
470
+140 6
112
672 62
91.67
550
+122 7
714 42
91.43
640 90
+74 8 92
736 22
93.75
750
110
-14 9
738
97.78
880
130
-142 10 72
720
-18
103.00
1030
150
-310
Price will exceed marginal revenue because the monopolist must lower the price to sell the additional unit. The lower price is applied to all of the units being produced, not just the last unit, thereby causing marginal revenue to be less than price. The added revenue will be the price of the last unit less the sum of the price cuts which must be taken on all prior units of output .
LO1
10-5

6. All customers must pay the same price
Monopoly Demand
All customers must pay the same price 1 2 3 4 5 6
$142
132
122
112
102 92 82
Loss = $30 D
Gain = $132
A pure monopolist, or any other imperfect competitor with a downsloping demand curve such as D, must set a lower price in order to sell more output. Here, by charging $132 rather than $142, the monopolist sells an extra unit (the fourth unit) and gains $132 from that sale. But from this gain must be subtracted $30, which reflects the $10 less the monopolist charged for each of the first 3 units. Thus, the marginal revenue of the fourth unit is $102 ( $132 - $30), considerably less than its $132 price.
LO1
10-6

7. All customers must pay the same price
Monopoly Demand
All customers must pay the same price 1 2 3 4 5 6
$142
132
122
112
102 92 82
Loss = $30 D
Gain = $132
This graph shows the demand and marginal revenue for a pure monopolist. Because it must lower price on all units sold in order to increase its sales, an imperfectly competitive firm’s marginal-revenue curve (MR) lies below its downsloping demand curve (D). MR
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LO1

8. Monopoly Demand Marginal Revenue < Price
Monopolist is a price maker – In a pure monopoly, the monopolist is the only producer, so the industry output is what that monopoly decides to produce. With a down-sloping demand curve, each amount of output has a unique price. When the monopolist decides on the quantity to produce, they are also determining the price.
Monopolist sets prices in elastic region of demand curve – Monopolists will never choose a price-quantity combination where price reductions cause total revenues to decrease. This would be the inelastic portion of the demand curve.
MR is less than price after the first unit sold. A price maker is a firm with pricing power, which is the ability of the firm to set its own price. The monopolist avoids setting the price in the inelastic range of demand.
10-8
LO2

9. Output and Price Determination
Demand and Marginal-Revenue Curves
Elastic
Inelastic
$200
150
100 50
$750
500
250 2 4 6 8 10 12 14 16 18
Price
Total Revenue D MR
Total-Revenue Curve
Total revenue (TR) increases at a decreasing rate, reaches a maximum, and then declines. Note that in the elastic region, TR is increasing and hence MR is positive. When TR reaches its maximum, MR is zero. This graph reflects the demand, marginal revenue, and total revenue for a pure monopolist. Because it must lower price on all units sold in order to increase its sales, an imperfectly competitive firm’s marginal-revenue curve (MR) lies below its downsloping demand curve (D). The elastic and inelastic regions of demand are highlighted. Note that in the elastic region, TR is increasing and hence, MR is positive. When TR reaches its maximum, MR is zero. In the inelastic region of demand, TR is declining, so MR is negative.
Notice there is no supply curve for the monopolist. There is no unique relationship between price and quantity supplied for the monopolist. TR
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LO2

10. Output and Price Determination
Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profits (if Any) in Pure Monopoly
Step 1
Determine the profit-maximizing output by finding where MR=MC.
Step 2
Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve.
Step 3
Determine the pure monopolist’s economic profit by using one of two methods:
Method 1. Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any).
Method 2. Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).
1.The MR = MC rule will tell the monopolist where to find its profit‑maximizing output level. This can be seen in Table 10.1 and Figure The same result can be found by comparing total revenue and total costs incurred at each level of production.
2.The pure monopolist has no supply curve because there is no unique relationship between price and quantity supplied. The price and quantity supplied will always depend on the location of the demand curve.
10-10
LO2

11. Output and Price Determination
$200
175
150
125 25
100 75 50
Price, Costs, and Revenue 1 2 3 4 5 6 7 8 9 10
Quantity
Pm=$122 MC
Economic
Profit
ATC
A=$94 D
The graph above demonstrates profit maximization by a pure monopolist. The pure monopolist maximizes profit by producing at the MR = MC output, here Qm = 5 units. Then, as seen from the demand curve, it will charge price Pm = $122. Average total cost will be A = $94, meaning that per unit profit is Pm - A and total profit is 5 X (Pm - A). Total economic profit is thus represented by the green rectangle.
MR=MC MR
10-11
LO2

12. Exit Question
62.) Where will a monopoly produce?

13. Homework Ch#10 Questions (1-6) & Problems (1-2) p.213-214
Ch#10 Test Thursday

14. Economics 3/28/17 http://mrmilewski.com
OBJECTIVE: Examine Pure Monopoly. AP Micro-4.1
Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective.
I. Daily Opener#63
-ACDC Econ Micro 4.4 Elastic and Inelastic Range of Demand for Monopolies
-ACDC Econ Micro 4.5 Socially Optimal and Fair Return for Monopolies
-ACDC Econ 4.6 Lump Sum and Per Unit
-ACDC Econ 4.7 Monopoly Graph Review and Practice
II. Notes#63
-notes monopoly
Homework Due Thursday: Ch#10 Q(7-11) & P(3-4)
Notice: Chapter#10 Test Thursday March 30th

15. Misconceptions of Monopoly Pricing
Not highest price – Many people believe that a monopoly will charge the highest price they can. This is not true because if the price is too high, sales and revenues will decline.
Total profit – The monopolist seeks total profit, not unit profit. This is because additional sales offset the lower unit profit.
Possibility of losses – Economic profit is more likely for a monopolist than a pure competitor. However, they can have losses. Demand can decrease or costs could escalate which would result in losses.
The monopolist does not charge the highest possible price because the monopolist can’t sell much output at that price and profits are too low. The monopolist is interested in total profit, not per unit profit. There is always the possibility that the monopolist will earn losses. Monopolists are not protected from changes in demand.
10-15
LO2

16. Misconceptions of Monopoly Pricing
Price, Costs, and Revenue
Quantity MC
ATC A
Loss Pm
AVC V D
If demand, D, is weak and costs are high, the pure monopolist may be unable to make a profit. Because Pm exceeds V (the average variable cost at the MR = MC output Qm), the monopolist will minimize losses in the short run by producing at that output. The loss per unit is A - Pm and the total loss is indicated by the red rectangle.
MR=MC MR Qm
10-16
LO2

17. Economic Effects of Monopoly
Pure competition is efficient
Monopoly is inefficient
S=MC MC Pm b
P=MC=
Minimum
ATC d Pc Pc c a
In this set of graphs we will compare the inefficiency of pure monopoly relative to a purely competitive industry. (a) In a purely competitive industry, entry and exit of firms ensures that price (Pc) equals marginal cost (MC) at the minimum average total-cost output where Qc is produced. Both productive efficiency (P = minimum ATC) and allocative efficiency (P = MC) are obtained (here at Qc). (b) In pure monopoly, the MR curve lies below the demand curve. The monopolist maximizes profit at output Qm, where MR = MC, and charges price Pm. Thus, output is lower (Qm rather than Qc) and price is higher (Pm rather than Pc) than they would be in a purely competitive industry. Monopoly is inefficient since output is less than that required for achieving minimum ATC (here at Qc) and because the monopolist’s price exceeds MC. Monopoly creates an efficiency loss (here triangle abc). There is also a transfer of income from consumers to the monopoly (here rectangle PcPmbd). D D MR Qc Qm Qc
(a)
Purely Competitive Market
(b)
Pure Monopoly
10-17
LO3

18. Economic Effects of Monopoly
Income transfer – Basically, a monopoly transfers income from consumers to the owners of the monopoly.
Cost complications
Economies of scale
X-Inefficiency – when a firm produces output at a higher cost than is necessary to produce it.
Technological advance – Monopolists are not as technologically progressive.
Income distribution is more unequal than it would be under a more competitive situation. The effect of the monopoly power is to transfer income from the consumers to the business owners. This will result in a redistribution of income in favor of higher-income business owners, unless the buyers of monopoly products are wealthier than the monopoly owners.
Costs complications: Costs for monopolies may not be the same as for more competitive firms. Following are 4 reasons why costs may differ:
1.Economies of scale may result in one or two firms operating in an industry experiencing lower ATC than many competitive firms. These economies of scale may be the result of spreading large initial capital cost over a large number of units of output (natural monopoly) or, more recently, spreading product development costs over units of output, and a greater specialization of inputs.
2.X‑inefficiency may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs. (see next slide for graph)
3.Rent‑seeking behavior often occurs as monopolies seek to acquire or maintain government‑granted monopoly privileges. Such rent‑seeking may entail substantial costs (lobbying, legal fees, public relations advertising, etc.), which are inefficient.
4.Technological progress and dynamic efficiency may occur in some monopolistic industries but not in others. The evidence is mixed. Some monopolies have shown little interest in technological progress. On the other hand, research can lead to lower unit costs, which help monopolies as much as any other type of firm. Also, research can help the monopoly maintain its barriers to entry against new firms.
10-18
LO3

19. X-Inefficiency Average total costs Quantity ATCx X ATC1 X' ATCx'
Average total costs
Quantity
ATCx X
ATC1 X'
ATCx'
Average
total cost
ATC2
The average-total-cost curve (ATC) is assumed to reflect the minimum cost of producing each particular level of output. Any point above this “lowest-cost” ATC curve, such as X or X', implies X-inefficiency: operation at a greater cost than the lowest cost possible for a particular level of output. Q1 Q2
10-19
LO3

20. Assessment and Policy Options
Antitrust laws
Break up the firm
Regulate it
Government determines price and quantity
Ignore it
Let time and markets get rid of monopoly
When monopoly power results in an adverse effect upon the economy, the government may choose to intervene on a case-by-case basis using antitrust laws. If the government feels that it is more beneficial to society to have a monopoly, then government will regulate it. Although there are legitimate concerns of the effects of monopoly power on the economy, monopoly power is not widespread. While research and technology may strengthen monopoly power, overtime it is likely to destroy monopoly position.
10-20
LO3

21. Global Perspective Competition from Foreign Multinational Corporations
Competition from foreign multinational corporations diminishes the market power of firms in the United States. Here are just a few of the hundreds of foreign multinational corporations that compete strongly with U.S. firms in certain American markets.
10-21
LO3

22. Charging different buyers different prices
Price Discrimination
Price discrimination
Charging different buyers different prices
Price differences are not based on cost differences
Conditions for success:
Monopoly power
Market segregation
No resale
Price discrimination is defined as charging different buyers different prices when such price differences are not justified by cost differences. Monopoly power means that the firm must have some pricing power. Pricing power is the ability of a firm to set its own price. Therefore we find price discrimination in all types of markets except perfect competition. Market segregation means that you have identified your different buyers and can separate your market based on their willingness to pay. No resale means that a low price buyer is prevented from buying at the low price and reselling the good to a high price buyer. Otherwise, your price discrimination scheme would break down.
10-22
LO4

23. Examples of Price Discrimination
Business travel
Electric utilities
Movie theaters
Golf courses
Railroad companies
Coupons
International trade
Business travelers have relatively inelastic demand due to no time to shop around and wait. Also, the firm is paying for this business trip and whenever someone else pays for your consumption, you are not as concerned about the price. Therefore, airlines charge business travelers higher prices than the rest of the population. Hotels will charge the business traveler higher rates than the rest of the population.
Movie theaters charge higher prices for the evening show than for an afternoon matinee. This is because those going to the matinee are more price sensitive than the rest of the population. Those going to the matinee may be retired, families with children, or unemployed people. Those going to the evening show often consider this a special event and are willing to pay full price or perhaps they are too busy working during the day to go to a matinee. This group will be less price sensitive. Also, movie theaters charge adults a higher price than children even though it costs the same amount to show a movie to an adult as to a child. This effort will bring in more people and more revenue because otherwise a family might not be able to afford to bring all members to the show.
Those who have the time and take the time to clip coupons and manage coupons are the price sensitive group. Those who do not take the time are those willing to pay regular price.
10-23
LO4

24. Graphical Analysis P P Economic profit Economic profit Pb Ps MC = ATCQs Ds Qb
The price-discriminating monopolist represented here maximizes its total profit by dividing the market into two segments based on differences in elasticity of demand. It then produces and sells at the MR = MC output in each market segment. (For visual clarity, average total cost (ATC) is assumed to be constant. Therefore MC equals ATC at all output levels.) (a) The firm charges a higher price (here, Pb) to customers who have a less elastic demand curve and (b) a lower price (here, Ps) to customers with a more elastic demand. The price discriminator’s total profit is larger than it would be with no discrimination and a single price. Db
MRs
MRb
(a) Small businesses
(b) Students
10-24
LO4

25. Socially optimal price Set price = marginal cost Fair return price
Regulated Monopoly
Natural monopolies
Socially optimal price
Set price = marginal cost
Fair return price
Set price = ATC
When monopoly power results in an adverse effect upon the economy, the government may choose to intervene on a case-by-case basis. Government usually intervenes when they feel that the monopoly is a natural monopoly. The dilemma for regulators is whether to choose a socially optimal price, where P = MC, or a fair‑return price, where P = ATC. P = MC is most efficient but may result in losses for the monopoly firm, at which point the government would have to subsidize the firm for it to survive. P = ATC does not achieve allocative efficiency, but does insure a fair return (normal profit) for the firm.
10-25
LO5

26. Regulated Monopoly Price and Costs (Dollars) Quantity Monopoly Price
Price and Costs (Dollars)
Quantity
Monopoly
Price Pm
Fair-Return
Price
Socially
Optimal
Price a f Pf
ATC
The socially optimal price Pr, found where D and MC intersect, will result in an efficient allocation of resources but may entail losses to the monopoly. The fair-return price, Pf, will allow the monopolist to break even but will not fully correct the underallocation of resources. Pr r MC D MR b Qm Qf Qr
10-26
LO5

27. De Beers once controlled about 80% of the world’s diamond market
De Beers’s Diamonds
De Beers once controlled about 80% of the world’s diamond market
Monopoly position eroded over time
New diamond discoveries
Nearly perfect artificial diamonds
Unfavorable media attention
Now focus on increasing demand for diamonds rather than controlling supply
De Beers was considered a monopoly that enjoyed monopoly profits, but now new technology is being used to produce nearly perfect artificial diamonds, which could be considered substitutes and has affected demand. At the same time, unfavorable media attention affected demand as well. The highlight here is that monopolies do not necessarily last forever.
10-27

28. Exit Question
63.) Write a multiple choice question for the Chapter#10 Test.

29. Homework Ch#10 Questions (7-11) & Problems (3-4) p.214-215
Study for Chapter#10 Thursday!

30. Economics 3/29/17 http://mrmilewski.com
OBJECTIVE: Examine Pure Monopoly. AP Micro-4.1
Language objective: SWBAT define essential vocabulary in regards to Micro economics. In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective.
I. Administrative Stuff
II. Chapter#10 Review
-ACDC Econ Micro 4.7 Monopoly Graph & Review
-ACDC Econ Micro 4.8 Price Discriminating Monopoly (First Degree)
-Welker Monopoly Video
Notice: Chapter#10 Test TOMORROW!

31. Homework
Study for Chapter#10 TOMORROW!