economics 2010 lecture 13 monopoly. monopoly how monopoly arises single price monopoly

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Economics 2010 Economics 2010 Lecture 13 Monopoly

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Page 1: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Economics 2010Economics 2010

Lecture 13

Monopoly

Page 2: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

MonopolyMonopoly

How monopoly arisesSingle price monopoly

Page 3: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

How Monopoly ArisesHow Monopoly Arises

A monopoly is an industry in which there is a single supplier of a good, service, or resource, that has no close substitutes and in which there is a barrier preventing the entry of new firms

Page 4: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

How Monopoly ArisesHow Monopoly Arises

Barriers to entry can be: legal barriers natural barriers

Page 5: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Legal barriers to entry create legal monopolies, examples are:

Public franchise (Canada Post, Royal Mail, in some countries the train companies of the telecomm or the electricity even the tobacco production or the selling of gas)

Government license (in most countries doctors, dentists, architects, bus drivers need a license to operate, sometimes hairdressers too!!!)

Patent (20 years in Canada); copyright is the same idea

Barriers to EntryBarriers to Entry

Page 6: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Natural barriers to entry create natural monopolies

Natural barriers arise if economies of scale are still available when a single firm can meet the entire market demand

The following figure shows this situation

Barriers to EntryBarriers to Entry

Page 7: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Barriers to EntryBarriers to Entry

The firm’s average total cost curve is ATC

The market demand curve is D

Page 8: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Barriers to EntryBarriers to Entry

Suppose the price is 5 cents per kilowatt-hour and the quantity demanded is 4 million killowatt-hours (per day)

Page 9: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Barriers to EntryBarriers to Entry

1 firm can produce this quantity for 5 cents a kilowatt-hour

But with 2 firms sharing the production, it costs 10 cents

Page 10: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Barriers to EntryBarriers to Entry

And with 4 firms sharing the production, it costs 15 cents per kilowatt-hour

This industry is a natural monopoly

Page 11: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Barriers to EntryBarriers to Entry•Knowing about the Minimum Efficient Scale of a type of business and the level of demand will help us predict the number of firms in a market in the long run

•We can then check whether an industry should be expected to be competitive

•Now we can check if it is expected to be a monopoly but it is for the same reasons

•Train services, electricity services, water, gas distributions, telecommunications services: they all have very high fixed costs and they have economies of scale for long ranges

Page 12: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Barriers to EntryBarriers to Entry•Therefore it is very easy than when we compare the MES with the demand level we see that one firm should be expected

•Sometimes even only one firm is too much => losses need to be subsidized if the service is deemed essential: most countries treat the railways this way...

Page 13: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Most real-world monopolies are regulated

You can read a brief intro about regulation at the end of Ch. 13 and a lot more in advanced courses

but we are going to focus on unregulated monopoly so that we can: understand why monopoly is regulated, understand monopolistic elements in many

markets

Monopoly and regulationMonopoly and regulation

Page 14: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Single-Price MonopolySingle-Price Monopoly

A single-price monopoly is a firm that sells all its output for one single price

All the firm’s customers pay the same price for each unit

Many monopolies operate in this way, but many do not: they price-discriminate instead

Page 15: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

A price-discriminating monopoly is a firm that sells each unit of output for the highest price it can get by:

Discriminating among customers--different customers pay different prices

Discriminating across quantities--one customer pays different prices for different quantities

Single-Price MonopolySingle-Price Monopoly

Page 16: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

We’re going to study a single-price monopoly first

What is the price charged by a monopoly and what is the quantity produced?

Monopoly costs are just like those we have seen for competitive industries

But monopoly revenue is special

Single-Price MonopolySingle-Price Monopoly

Page 17: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

A monopolist faces the market demand curve He sees the big picture (like the astronauts, who

can see the Earth round, while the competitive firm could only see the small picture, as we see a flat horizon)

A monopolist’s demand curve is downward-sloping

A monopolist is a price maker, in contrast to a perfectly competitive firm, which is a price taker

Demand and RevenueDemand and Revenue

Page 18: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

A monopolist’s marginal revenue is the addition to total revenue from selling one more unit

Recall that in perfect competition, marginal revenue equaled price

In single-pricing monopoly, marginal revenue is always less than price

Demand and RevenueDemand and Revenue

Page 19: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

The following table illustrates a monopoly’s demand and revenue schedules

Demand and RevenueDemand and Revenue

Page 20: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price Quantity

demanded

a 20 0

b 18 1

c 16 2

d 14 3

e 12 4

f 10 5

g 8 6

Single-Price Monopoly RevenueSingle-Price Monopoly Revenue

Total

revenue

0

18

32

42

48

50

48

Marginal

revenue

…………18

…………14

…………10

………… 6

………… 2

…………–2

Page 21: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

This illustrates the demand curve and marginal revenue curve of a single-price monopolist

Demand and RevenueDemand and Revenue

Page 22: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

The demand curve is D

The price is cut from $16 to $14

Marginal revenue is $10

The marginal revenue curve is MR

Demand and RevenueDemand and Revenue

Page 23: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

A single-price monopoly always charges a price at which demand is elastic

The easiest way to see why is to look again at the demand curve and marginal revenue curve and recall what you learned weeks ago about the elasticity along a linear demand curve

Revenue and ElasticityRevenue and Elasticity

Page 24: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Look at this monopoly’s demand curve and marginal revenue curve

Check the three elasticity ranges

Revenue and ElasticityRevenue and Elasticity

Page 25: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

At prices above $10, demand is elastic

At prices below $10, demand is inelastic

At $10, demand is unit elastic

Revenue and ElasticityRevenue and Elasticity

Page 26: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

When demand is unit elastic, total revenue is maximized

Marginal revenue becomes negative at prices below $10

Revenue and ElasticityRevenue and Elasticity

Page 27: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Revenue and Revenue and ElasticityElasticity

When demand is unit elastic, total revenue is maximized

Marginal revenue becomes negative at prices below $10

Page 28: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Revenue and Revenue and ElasticityElasticity

When demand is unit elastic, total revenue is maximized

Marginal revenue becomes negative at prices below $10

Page 29: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Revenue and Revenue and ElasticityElasticity

When demand is unit elastic, total revenue is maximized

Marginal revenue becomes negative at prices below $10

Page 30: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Revenue and Revenue and ElasticityElasticity

Producing more than 5 haircuts a day brings in less revenue that producing 5 a day

Page 31: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output Decision

But revenue is not all that matters!!!A single-price monopoly produces the

quantity that maximizes profitThis quantity occurs where total

revenue minus total cost is largest

Page 32: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output Decision

Here, economic profit is maximized by producing 3 haircuts an hour

Page 33: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output Decision

The profit-maximizing output also can be found as the quantity at which marginal cost equals marginal revenue (as we know from competition)

The following figure shows this way of looking at the profit-maximizing decision

Page 34: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output DecisionMarginal

cost equals marginal revenue at 3 haircuts an hour

Economic profit is $12 an hour

Page 35: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output DecisionThis figure

also shows how a monopoly sets its price

Page 36: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output DecisionThe price is

the highest at which the profit-maximizing quantity can be sold

Page 37: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output DecisionHere, that

price is $14 per haircut

Page 38: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

Price and Output DecisionPrice and Output Decision

There is no monopoly supply curveJust a decision about how much to

produce and at what price to sell it

Page 39: Economics 2010 Lecture 13 Monopoly. Monopoly  How monopoly arises  Single price monopoly

NextNextPrice discriminating

monopolyREAD THE CHAPTER!!!