1. Unit 4: Imperfect Competition
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2. REVIEW ACTIVITY Name That Concept Rules: Cannot use the word(s)
Focus on the concept not word
Ex: Price Maker
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3. Imperfect Competition Barriers to Entry Dead Weight Loss
Name That Concept
Monopoly
Imperfect Competition
Barriers to Entry
Dead Weight Loss
Productive Efficiency
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4. Allocative Efficiency
Name That Concept
Marginal Revenue
MR = MC
Shut down rule
Natural Monopoly
Allocative Efficiency
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5. How much is the TR, TC and Profit or Loss?
Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve.
How much is the TR, TC and Profit or Loss? P
$10 9 8 7 6 5 MC
ATC
Profit =$20 D MR Q 5
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6. 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 6
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7. Regulating Monopolies
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8. 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
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9. 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)
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10. 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 10
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11. Natural Monopoly Unregulated Fair Return Socially Optimal (No DWL) PPM MC
PFR
ATC
QSO MR D Q QM
QFR
Qsocially optimal 11
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12. 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 12
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13. 2008 Audit Exam
40. D

14. Perfect Price Discrimination
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15. Price Discrimination Price Discrimination:
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)
SPHS football games (students vs. parents)
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16. 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
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17. P Qd TR MR
$11 -
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18. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10
$10
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19. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9
$10
$10 $9
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20. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8
$10
$10 $9
$10 $9 $8
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21. 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
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22. 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
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23. 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
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24. Price Discriminating Monopoly
Regular Monopoly vs.
Price Discriminating Monopoly P MC Pm
ATC D MR Q Qm
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25. A perfectly discriminating can charge each person differently so the Marginal Revenue = DemandMC
ATC D MR Q 25
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26. 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 26
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27. 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 27
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28. Can You Do The Following?
1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit.
2. Draw a perfectly competitive industry AND firm at long-run equilibrium
3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit
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