chapter 15 monopoly!!. monopoly the monopoly is the price maker, and the competitive firm is the...

Chapter 15Monopoly!!

Monopoly

the monopoly is the price maker, and the competitive firm is the price taker.

A monopoly is when it’s product does not have close substitutes. ALso when a specific individual or enterprise has sufficient control over a particular product

monopoly? but how do they arise?

other firms can’t enter the market and compete with the monopoly.

The cause of monopoly is (barriers to entry)

Barriers to entry have three keys

A key resource is owned by one firm

The government gives the right to the single firm to produce goods and services

the costs of production make the single producer more efficient.

Two types of monopolys

government created monopolies.

government restricts entry by giving the right to a single firm to sell goods

to serve public interest, copyright laws and patent is used.

Two types of monopolies

Natural Monopoly

The existence of an industry (gas, electricity, water, for example) in which the average costs of production per unit fall as output increases.

Economies of scale as a cause of monopoly

Economies of scale is often defined as a firm which enjoys economies of scale for all reasonable firm sizes; because it is always more efficient for one firm to expand than for new firms to be established, the natural monopoly has no competition.

How monopolies make production and pricing decisions

competition vs Monopoly

monopoly is a price maker, and reduces price to sell more

A competitive firm is a price taker and sells as much or as little at the same price

However, in a monopoly (sole producer) the demand curve is shifting downwards, while a competitive firm’s demand curve is horizontal.

What about the Revenue?

• Total Revenue• P Q = TR

• Average Revenue• TR/Q = AR = P

• Marginal Revenue• ∆TR/∆ Q = MR

Chart

Monopolist REvenue

It is always crucial to remember that marginal revenue is always less than the price of the good.

When a monopoly increase the amount it sells, it has two effects on total revenue

The output effect- the more output sold, Q is higher

The price effect-Price falls, so p falls

A monopoly wants to sell more so it must lower price. that is why mr<p

Monopolist profit maximization

a monopoly profit maximizes when marginal revenue equals marginal cost

IT THEN USES THE DEMAND CURVE TO FIND THE PRICE

THAT WILL INDUCE CONSUMERS TO BUY THAT

QUANTITY.

Monopolist’s profit!For a monopoly firm, price exceeds marginal cost in order to earn profit ! p>mc

For a competitive firm, price is equal to marginal cost in order to earn profit! p=mc

DON’T FORGET THAT AS LONG AS PRICE IS GREATER THAN ATC,

PROFIT WILL BE EARNED

Deadweight loss strikes back!

Unfortunately, sometimes monopolies produce less than the social output (inefficiency)

The deadweight loss is created similarly as the tax.

Public policy toward monopoly

government responds to the problem of monopoly in one of four ways

making monopolized industries more competitive

regulating the behavior of monopolies

Turning some private monopolies into public enterprises

doing nothing at all.

Antitrust laws

why are antitrust laws used?

Becomes it promotes competition

they allow government to prevent mergers

they allow government to break up companies

they prevent companies from performing activities that make markets less competitive.

antitrust laws

two major antitrust laws

sherman antitrust act

reduced market power of the large and powerful “trusts” of that time period

clayton antitrust act

strengthen government power, and authorized private lawsuits.

price discrimination

Price discrimination is the practice of one retailer, wholesaler, or manufacturer charging different prices for the same items to different customer.

Price discrimination can increase the monopolists profit, and it can reduce deadweight loss as well.

] Profit

Price

0 Quantity

Deadweightloss

DemandMarginalrevenue

Consumersurplus

Quantity sold

Monopolyprice

Marginal cost

Perfect price discrimination

Perfect price discrimination refers to the situation when the monopolist knownsthe willingness to pay of each customer and can charge each customer a different price.

examples

movie tickets

airplane tickets

discount coupons

financial aid

quantity discounts

Summary

the monopoly is the price maker, and the competitive firm is the price taker.

Barriers to entry have three keys

A key resource is owned by one firm

The government gives the right to the single firm to produce goods and services

the costs of production make the single producer more efficient.

Summary Economies of scale is often defined as a firm which enjoys economies of scale for all reasonable firm sizes; because it is always more efficient for one firm to expand than for new firms to be established, the natural monopoly has no competition.\

a monopoly profit maximizes when marginal revenue equals marginal cost

For a monopoly firm, price exceeds marginal cost in order to earn profit ! p>mc

For a competitive firm, price is equal to marginal cost in order to earn profit! p=mc

Summary

sometimes monopolies produce less than the social output (inefficiency) Deadweight loss

antitrust laws reduces market power.

Price discrimination can increase the monopolists profit, and it can reduce deadweight loss as well.

Questions

what is a monopoly?

why mr lower than the demand curve?

at which point does the monopoly maximizes its profit?