1. Unit 4: Imperfect Competition1

2. Memorizing vs. Conceptualizing
Try memorizing the above number
How effective is memorizing it?
The point: If you try to MEMORIZE all the graphs of economics you will forget them. You must CONCEPTUALIZE them!
Trick: The number is made up of the first ten prime numbers

3. 4 Market Structures 3

4. Imperfect Competition
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Monopolistic
Competition
Pure
Monopoly
Pure
Monopoly
Oligopoly
Oligopoly
Imperfect Competition
Every product is sold in a market that can be considered one of the above market structures.
For example:
Fast Food Market
The Market for Cars
Market for Operating Systems (Microsoft)
Strawberry Market
Cereal Market 4

5. Monopoly 5

6. Characteristics of Monopolies6

7. 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 7

8. 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. 8

9. Examples of Monopolies9

10. What do you already know about monopolies?
True or False?
All monopolies make a profit.
Monopolies are usually efficient.
All monopolies are bad for the economy.
All monopolies are illegal.
Monopolies charge the highest price possible
The government never prevents monopolies from forming. 10

11. 11

12. 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) 12

13. 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. 13

14. Drawing Monopolies 14

15. 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 15

16. 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! 16

18. Why is MR less than Demand?P Qd TR MR
$11 - 18

19. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10
$10 19

20. Why is MR less than Demand?P Qd TR MR
$11 -
$10 1 10 $9 2 18 8
$10 $9 $9 20

21. 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 21

22. 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 22

23. 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 23

24. 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 24

25. 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 25

26. 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 26

27. 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 27

31. Calculating Marginal Revenue31

32. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 1 15 2 14 3 13 4 12 5 11 6 10 7 9 8 32

33. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 1 15 2 14 28 3 13 39 4 12 48 5 11 55 6 10 60 7 9 63 8 64 33

34. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 - 1 15 2 14 28 13 3 39 11 4 12 48 9 5 55 7 6 10 60 63 8 64 -1 -3 34

35. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 - 1 15 2 14 28 13 3 39 11 4 12 48 9 5 55 7 6 10 60 63 8 64 -1 -3 35

38. Elastic vs. Inelastic Range of Demand Curve38

40. Maximizing Profit 40

45. Are Monopolies Efficient?45

51. 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 51

53. Lump Sum vs. Per Unit Taxes and Subsidies
ACDC Econ Video 53

54. 2007 FRQ #1