1. Unit 4: Imperfect Competition

2. REVIEW Name That Concept Rules: Cannot use the word(s)
Focus on the concept not word
Ex: Price Maker

3. Imperfect Competition Barriers to Entry Dead Weight Loss
Name That Concept
Monopoly
Imperfect Competition
Barriers to Entry
Dead Weight Loss
Productive Efficiency

4. Allocative Efficiency
Name That Concept
Marginal Revenue
MR = MC
Shut down rule
Natural Monopoly
Allocative Efficiency

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

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

7. Are Monopolies Efficient?

8. 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 8

9. 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 D MR Q Qm 9

10. Regulating Monopolies

11. 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

12. 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)

13. Regulating Monopolies
Where does the firm produce if it is unregulated? P MC Pm
ATC D MR Q Qm 13

14. Regulating Monopolies
Price Ceiling at Socially Optimal
Socially Optimal = Allocative Efficiency P MC Pm
ATC
Pso D MR Q Qm
Qso 14

15. 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 15

16. Regulating Monopolies
Unregulated
Socially Optimal P MC
Fair Return Pm
ATC
Pso
Pfr D MR Q Qm
Qso
Qfr 16

17. 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 17

18. Price Discrimination

19. 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)
SPHS football games (students vs. parents)

20. 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

21. P Qd TR MR
$11 -

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

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

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

25. 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

26. 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

27. 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

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

29. A perfectly discriminating can charge each person differently so the Marginal Revenue = DemandMC
ATC D MR Q 29

30. 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 30

31. 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 31

32. 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