1. Unit 4: Imperfect Competition1

2. Monopoly 2

3. Characteristics of Monopolies3

4. 5 Characteristics of a Monopoly
Single Seller
One Firm controls the vast majority of a market
The Firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
The firm can manipulate the price by changing the quantity it produces (ie. shifting the supply curve to the left).
Ex: California electric companies 4

5. 5 Characteristics of a Monopoly
4. High Barriers to Entry
New firms CANNOT enter market
No immediate competitors
Firm can make profit in the long-run
5. Some “Nonprice” Competition
Despite having no close competitors, monopolies still advertise their products in an effort to increase demand. 5

6. Examples of Monopolies6

7. Four Origins of Monopolies
Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, San Diego Chargers, Cable TV, Qualcomm Hot Dogs…
-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubix cubes…
-Government allows monopoly for public benefits or to stimulate innovation.
-The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years) 7

8. Four Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Band-Aide…
-Patents and widespread availability of certain products lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies (SDGE)
If there were three competing electric companies they would have higher costs.
Having only one electric company keeps prices low
-Economies of scale make it impractical to have smaller firms.
Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost. 8

9. Drawing Monopolies 9

10. Good news… Only one graph because the firm IS the industry.
The cost curves are the same
The MR= MC rule still applies
Shut down rule still applies 10

11. THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE!
The Main Difference
Monopolies (and all Imperfectly competitive firms) have downward sloping demand curve.
Which means, to sell more a firm must lower its price.
This changes MR…
THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE! 11

12. Why is MR less than Demand?P Qd TR MR
$11 - 12

13. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10
$10 13

14. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8
$10 $9 $9 14

15. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6
$10 $9 $9 $8 $8 $8 15

16. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 16

17. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 17

18. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 18

19. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 19

20. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 20

21. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $9
MR IS LESS THAN
PRICE $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 21

22. Calculating Marginal Revenue22

23. Does the Marginal Revenue equal the price?
To sell more a firm must lower its price. What happens to Marginal Revenue?
Price
Quantity
Demanded
Total Revenue
Marginal Revenue $6 $5 1 $4 2 $3 3 $2 4 $1 5
Does the Marginal Revenue equal the price? 23

24. Does the Marginal Revenue equal the price?
To sell more a firm must lower its price. What happens to Marginal Revenue?
Price
Quantity
Demanded
Total Revenue
Marginal Revenue $6 $5 1 5 $4 2 8 $3 3 9 $2 4 $1
Does the Marginal Revenue equal the price? 24

25. Draw Demand and Marginal Revenue Curves
To sell more a firm must lower its price. What happens to Marginal Revenue?
Price
Quantity
Demanded
Total Revenue
Marginal Revenue $6 - $5 1 5 $4 2 8 3 $3 9 $2 4 -1 $1 -3
MR DOESN’T
EQUAL PRICE
Draw Demand and Marginal Revenue Curves 25

26. Plot the Demand, Marginal Revenue, and Total Revenue Curves
$15 10 5 P Q TR
$64 40 20 Q 26

27. Demand and Marginal Revenue Curves
What happens to TR when MR hits zero?
$15 10 5 P D Q TR MR
$64 40 20
Total Revenue is at it’s peak when MR hits zero TR Q 27

28. Elastic vs. Inelastic Range of Demand Curve28

29. Elastic and Inelastic RangeP
Elastic
Inelastic
$15 10 5
Total Revenue Test
If price falls and TR increases then demand is elastic. D Q TR
A monopoly will only produce in the elastic range MR
$64 40 20
Total Revenue Test
If price falls and TR falls then demand is inelastic. TR Q 29

30. Maximizing Profit 30

31. MR = MC What output should this monopoly produce?
How much is the TR, TC and Profit or Loss? $9 8 7 6 5 4 3 2 P MC
ATC
Profit =$5 D MR Q 31

32. Conclusion: A monopolists produces where MR=MC, buts charges the price consumer are willing to pay identified by the demand curve. $9 8 7 6 5 4 3 2 P MC
ATC D MR Q 32

33. How much is the TR, TC, and Profit or Loss?
What if cost are higher?
How much is the TR, TC, and Profit or Loss? MC
$10 9 8 7 6 5 4 3 P
ATC
AVC D
TR= $90
TC= $100
Loss=$10 MR Q 33

34. Identify and Calculate:
TR=
TC=
Profit/Loss=
Profit/Loss per Unit=
$70
Identify and Calculate:
$56
$14 $2 P
$10 9 8 7 6 5 4 MC
ATC D MR Q 34

35. Are Monopolies Efficient?35

36. Monopolies vs. Perfect Competition
S = MC P CS
In perfect competition, CS and PS are maximized.
Ppc PS D Q
Qpc 36

37. Monopolies vs. Perfect Competition
S = MC P
At MR=MC,
A monopolist will
produce less and
charge a higher price Pm
Ppc D MR Q Qm
Qpc 37

38. Monopolies vs. Perfect Competition
Where is CS and PS for a monopoly?
S = MC P CS
Total surplus falls.
Now there is DEADWEIGHT LOSS Pm PS
Monopolies underproduce and over charge, decreasing CS and increasing PS. D MR Q Qm 38

39. Are Monopolies Productively Efficient?
No. They are not producing at the lowest cost (min ATC)
Does Price = Min ATC? $9 8 7 6 5 4 3 2 P MC
ATC D MR Q 39

40. Monopolies are NOT efficient!
Are Monopolies Allocatively Efficiency?
No. Price is greater. The monopoly is under producing.
Does Price = MC? $9 8 7 6 5 4 3 2 P MC
ATC
Monopolies are NOT efficient! D MR Q 40

41. Because there is little external pressure to be efficient
Monopolies are inefficient because they…
Charge a higher price
Don’t produce enough
Not allocatively efficiency
Produce at higher costs
Not productively efficiency
Have little incentive to innovate
Why?
Because there is little external pressure to be efficient 41

42. Natural Monopoly
One firm can produce the socially optimal quantity at the lowest cost due to economies scale. P
It is better to have only one firm because ATC is falling at socially optimal quantity MC
ATC MR D Q
Qsocially optimal 42

43. Regulating Monopolies43

44. Why Regulate? How do they regulate?
Why would the government regulate an monopoly?
To keep prices low
To make monopolies efficient
How do they regulate?
Use Price controls: Price Ceilings
Why don’t taxes work?
Taxes limit supply and that’s the problem 44

45. Where should the government place the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency) OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit) 45

46. Regulating Monopolies
Where does the firm produce if it is unregulated? P MC Pm
ATC D MR Q Qm 46

47. Regulating Monopolies
Price Ceiling at Socially Optimal
Socially Optimal = Allocative Efficiency P MC Pm
ATC
Pso D MR Q Qm
Qso 47

48. Regulating Monopolies
Price Ceiling at Fair Return
Fair Return means no economic profit P MC Pm
ATC
Pso
Pfr D MR Q Qm
Qso
Qfr 48

49. Regulating Monopolies
Unregulated
Socially Optimal P MC
Fair Return Pm
ATC
Pso
Pfr D MR Q Qm
Qso
Qfr 49

50. Regulating a Natural Monopoly
What happens if the government sets a price ceiling to get the socially optimal quantity? P
The firm would make a loss and would require a subsidy MC
ATC
Pso MR D Q
Qsocially optimal 50

51. Lump Sum vs. Per Unit Taxes and Subsidies
ACDC Econ Video 51

52. Price Discrimination 52

53. Price Discrimination Definition:
Practice of selling the same products to different buyers at different prices
Examples:
Airline Tickets (vacation vs. business)
Movie Theaters (child vs. adult)
All Coupons (spenders vs. savers) 53

54. PRICE DISCRIMINATION Requires the following conditions:
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:
Must have monopoly power
Must be able to segregate the market
Consumers must NOT be able to resell product 54

55. P Qd TR MR
$11 - 55

56. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10
$10 56

57. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9
$10
$10 $9 57

58. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8
$10
$10 $9
$10 $9 $8 58

59. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8 $7 4 34 7
$10
$10 $9
$10 $9 $8
$10 $9 $8 $7 59

60. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49
$10
$10 $9
$10 $9 $8
$10 $9 $8 $7
$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5
$10 $9 $8 $7 $6 $5 $4 60

61. WHEN PRICE DISCIMINATINGQd TR MR
$11 -
$10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49
$10
$10 $9
WHEN PRICE DISCIMINATING
MR = D
$10 $9 $8
$10 $9 $8 $7
$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5
$10 $9 $8 $7 $6 $5 $4 61

62. Price Discriminating Monopoly
Regular Monopoly vs.
Price Discriminating Monopoly P MC Pm
ATC D MR Q Qm 62

63. A perfectly discriminating can charge each person differently so the Marginal Revenue = DemandMC
ATC D MR Q 63

64. Identify the Price, Profit, CS, and DWL
A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL P MC
ATC D
=MR Q
Qnm 64

65. Identify the Price, Profit, CS, and DWL
A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL P MC
ATC
Many prices
More profit D
=MR
Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Q
Qnm 65