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Published byWyatt Greene Modified over 11 years ago
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Unit 4 PPT 2 Regulation and Price Discrimination
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Are Monopolies Efficient?
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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 3
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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 4
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Regulating Monopolies
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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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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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Regulating Monopolies
Where does the firm produce if it is unregulated? P MC Pm ATC D MR Q Qm 8
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Regulating Monopolies
Price Ceiling at Socially Optimal Socially Optimal = Allocative Efficiency P MC Pm ATC Pso D MR Q Qm Qso 9
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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 10
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Regulating Monopolies
Unregulated Socially Optimal P MC Fair Return Pm ATC Pso Pfr D MR Q Qm Qso Qfr 11
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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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Price Discrimination
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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)
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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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P Qd TR MR $11 -
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Results of Price Discrimination
Qd TR MR $11 - $10 1 10 $10
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Results of Price Discrimination
Qd TR MR $11 - $10 1 10 $9 2 19 9 $10 $10 $9
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Results of Price Discrimination
Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $10 $10 $9 $10 $9 $8
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Results of Price Discrimination
Qd 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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Results of Price Discrimination
Qd 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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WHEN PRICE DISCIMINATING
Qd 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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Price Discriminating Monopoly
Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Q Qm
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A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
MC ATC D MR Q 24
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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 25
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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 26
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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
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