Pure Monopoly. The antithesis of Pure Competition!
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1 Pure Monopoly The antithesis of Pure Competition!
2 Characteristics of the Pure Monopoly Single seller a sole producer No close substitutes unique product Price maker control over price Blocked entry strong barriers to entry block potential competition Non-price competition mostly PR (standard product) or advertising the product (differentiated) Public utility companies Natural Gas Electric Water Near monopolies Intel Wham-O Professional sports teams LO1 10-2
3 Why Study Monopolies? Most goods and services are produced in markets other than Monopolies and Pure Competition, but share traits of both. Do you recognize any difference between the two levels of market competition? Is Price = MC in a Monopoly? Is Price = Minimum ATC in a monopoly?
4 Allocative vs. Productive Efficiency
5 Long Run Pure Competition and Efficiency Can you identify the relationship between Long Run Pure Competitive efficiency outcomes and the PPF on the preceding page?
6 Monopoly and Allocative/Productive Efficiency
7 The Monopolists keys to Success Barriers to entry: a factor that keeps firms from entering an industry Economies of scale: ex. Boeing, Ma Bell (natural monopoly) Legal barriers: patents and licenses Ex. Merck, Fein Multi-tool Ownership of essential resources: Ex. Alcoa, De Beers Pricing: ex. Microsoft LO1 10-7
8 Monopoly Demand Curve -The pure monopolist is the industry (note difference to Pure Competition) -Demand curve is the market demand curve -The Demand curve is downward sloping (Please remember why) -To increase output the Monopolist must lower price! LO1 10-8
9 Monopoly Revenue Function Marginal Revenue is less than price for the monopoly! -Cost Data used from Chapter 9 Keep in mind that Marginal Revenue is a function of Demand.
10 Marginal Revenue is less than Demand(very different from PC) 1. The Monopolist is a price maker? Why? Downward Sloping Demand curve? -Can the maker affect price by making more products? 2. The Monopolist will attempt to produce in the elastic portion of the Demand function. -Note that marginal revenue is negative at some quantity. Refer to our Elasticity notes.
11 Where does the Monopolist produce? Steps for Graphically Determining the Profit-Maximizing Output, Profit- Maximizing Price, and Economic Profits (if Any) in Pure Monopoly Step 1 Step 2 Step 3 Determine the profit-maximizing output by finding where MR=MC. Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist s demand curve. Determine the pure monopolist s economic profit by using one of two methods: Method 1. Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any). LO2 Method 2. Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any)
12 Profit Maximization The Monopolist $200 Price, Costs, and Revenue 175 P 150 m =$ Economic Profit A=$94 MR=MC MR MC Quantity ATC D LO2 What is the amount of economic profit earned by the monopolist in the graph above? 10-12
13 Monopoly Misconceptions 1. Monopolists will not charge the highest price, but instead where they maximize Profits. Remember they face a downward sloping demand curve 2. The Monopolist can suffer losses. Why? A. Falling demand B. Rising resource prices -Should the firm above exit the industry or shut down if faced with a short run decision? LO
14 Economic Inefficiency - Monopoly 1. The price > MC which creates Deadweight loss and an output that does not produce allocative efficiency
15 Graph of Data from chapters 9 and Price is NOT = MINIMUM ATC thus the monopolist is not producing a productive efficient output
16 Observe data from chapter 9 and chapter 10. What quantity will the firm produce? What is market price for the monopolist? Does the Price = the Marginal Revenue? Does the price equal the MINIMUM ATC?
17 Price Discrimination and the Monopoly -the practice of selling a specific product at more than one price although the cost of production remains unchanged" How? 1. Charging customers a different price (lower) after original purchase 2. Charging some customers one price and others another Conditions for Price Discrimination; 1. The firm must have some form of monopoly power 2. The firm can separate buyer due to differing elasticities 3. The product cannot be resold. (arbitrage) LO
18 Price Discrimination Examples of Price Discrimination in the Marketplace -coupons; don t forget how some people are more price sensitive and discounted prices can increase revenue if demand is elastic -Movie theaters; kids vs. adults vs. seniors and don t forget 5 dollar movie night on tuesdays! -College students; We have discussed this many times!!! -Utilities; Higher rates for lighting but lower rates for heating Why? LO
19 A Graphical Analysis of Price Discrimination Which graph above best represents the demand for a movie ticket by a senior citizen? A teenager? How can the monopoly increase revenue for each buyer?
20 Rate Regulation and the Natural Monopoly 1. Why is the graph above representing a natural monopoly? 2. Why is the socially optimal price at P=MC? What problem exists at this price? 3. Why is the fair return price at P=ATC?
21 Why are Monopolies so Rare?
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