monopoly sfls online

I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) MonopolyMarket Structure

Some companies can do things cheaper being large

And sometimes its cheaper to have 1 company produce things in the market instead of many

Like with many utilities

Can you imagine having 50 water companies with 50 sets of pipes instead of just 1 set?

Seems natural to have a monopoly in some markets

But some markets its unnatural

Some companies have artificial monopolies and these can be the kind that hurt consumers.

And they can have the kind of power to charge high prices and difference prices to different types of people.

Market StructurePerfect CompetitionPure MonopolyLess competitive (greater degree of imperfection)

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IV.) MonopolyMarket StructureHard to enter/exit marketNot competitiveOnly one sellerNot efficient allocation

-Three types Non-Price Discriminating Price Discriminating Natural Monopoly-Then regulating monopolies Short summary of what we will look at

IV.) MonopolyMarket Structure

One( no substitutes)No SubstitutesAlmost impossible for others to enter market

P > MRP > MC

P > AC big LR profits

Characteristics Perfect CompetitionMonopolistic CompetitionOligopolyMonopoly# of sellersMany (price takers)Substitution of Product sold Only one product type from all sellersBarriers to entry into marketNo barriers to enter/ exitPricing vs MC and MRP =MC=MR

Efficiently Efficient with zero econ profit P = AC

IV.) Monopoly

-only one firm-Very high barriers to enter market, almost impossible to start a new business in this marketPrice Maker- Can set its own price as high as customers are willing to pay

IV.) Monopoly

Two types of Price Makers to examine side by side- Charges every customer the same price. 1.) Non- price discriminating (normal) 2.) Price discriminating - If it wants to increase its output it must decrease the price for everyone- Charges every customer the highest possible price- Will produce more then a non-price discriminating monopoly (normal)MR P for this oneMR = P for this one

(MR) Marginal RevenueProfit MaximizationProfit-Maximizing Output:level at which (MR) marginal revenue equals (MC) marginal cost MR = MCWe assume all firms are profit maximizing, producing at the point where their profits are at their highest(MC) Marginal Cost

This is still the output answer but the graph is a little harder then perfect competition from before.

PQSDQQ1P1Market D + SPPC Firm Demand CurveP=MR =AR =DI.) Perfect Competition DemandThis point is a normal profit ( = zero economic profit)- other firms wont want to enter the market because there is no economic (abnormal ) profits- Output is productively and allocatively efficient

PQD = PQMonopoly Demand CurvePPC Firm Demand CurveP=MR =AR =DI.) Monopoly vs PC Demand Price MakerSince a Monopoly is the only firm in the market the demand line for a monopoly is the entire market demand line.This will determine the price (P), but this does not determine MR and where on the line to produce at.

IV.) Monopoly DemandQP

****The important thing to understand is that when a monopoly wants to sell at a larger Q it must lower its price on every single unit made, including ones already made D = PTo sell a larger Q, the firm must reduce P on all units. Thus, MR P.2040106

n.a.The table shows the market demand for coffee. Fill in the missing spaces of the table. What is the relation between P and AR? Between P and MR? IV.) Monopoly Demand example

QPTRARMR0$4.5014.0023.5033.0042.5052.0061.50

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Here, P = AR, same as for a competitive firm.

Here, MR < P, whereas MR = P for a competitive firm. 1.5062.0052.5043.0033.5024.001

n.a.$4.500MRARTRPQ

IV.) Monopoly Demand example

*When the AR column appears, note that AR = P at every quantity. This, of course, is a tautology.

When the MR column appears, note that MR is less than P. This is not as easy to see, because the MR numbers are offset from the rows of the table, just as if you were in an elevator stuck between two floors. But students can still see that MR < P.

For example, in the range of output of Q=2 to Q=3, the price ranges from $3.50 to $3.00, but MR is only $2.

-3-2-101234501234567QP, MR$

IV.) Monopoly Demand example

**The numbers in the table are from the preceding exercise. Students can see either from the table or the graph that, at any Q, MR < P.

IV.) Monopoly DemandQPD = P = ARMRProfit-Maximizing Q:

Where marginal revenue equals marginal cost MR = MCMCStep 1

IV.) Monopoly DemandQPD = P = ARMRPrice:Profit-Maximizing Q:

Where marginal revenue equals marginal cost MR = MC D = P = ARWhere average revenue meets the quantity producedMCStep 2

IV.) Monopoly DemandQPD = P = ARTo sell a larger Q, the firm must reduce P on all units. Thus, MR P.And will always be,MR < PMRPrice:Profit-Maximizing Q:

Where marginal revenue equals marginal cost MR = MC D = P = ARWhere average revenue meets the quantity producedMCALL old/new products are at the new low price

Increasing Q has two effects on revenue:

Output effect: higher output raises revenuePrice effect: lower price reduces revenue

To sell a larger Q, the monopolist must reduce the price on all the units it sells.

Hence, MR < P

MR could even be negative if the price effect exceeds the output effectIV.) Monopoly Demand

**Note that a competitive firm has the output effect but not the price effect: the competitive firm does not need to reduce its price in order to sell a larger quantity, so, for the competitive firm, MR = P.

0Demand for coffee Point A 30 x 12 = 360Point B50 x 8 = 400The total revenue is increased from 360 to 400. So an increase in price led to more revenue since the demand is inelastic, you can raise your price and make more money, though less people buy it.Example Total Revenue TestRemember the output and price effect with elasticity?

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QPD = ARTo sell a larger Q, the firm must reduce P on all units. Thus, MR P.And will always be,MR < PMRPrice:P = D = ARWhere average revenue meets the quantity producedIV.) Monopoly Demand

IV.) Monopoly Price

QPD = ARMRMCProfit-Maximizing Level

Where marginal revenue equals marginal cost MR = MCWe assume all firms are profit maximizing, producing at the point where their profits are at their highest.IV.) Monopoly PriceStep 1


Where marginal revenue equals marginal cost MR = MCPrice:P = D = ARWhere average revenue meets the quantity producedWe assume all firms are profit maximizing, producing at the point where their profits are at their highest.IV.) Monopoly PriceStep 2


Where marginal revenue equals marginal cost MR = MCPrice:P = D = ARWhere average revenue meets the quantity producedWe assume all firms are profit maximizing, producing at the point where their profits are at their highest.IV.) Monopoly Price

IV.) Monopoly Profit

QPD = ARMRMCATC

Q = ATCCost:Profit-Maximizing Level

Where marginal revenue equals marginal cost MR = MCPrice:P = D = ARWhere average revenue meets the quantity producedThis is a monopoly in the Short Run and in the Long Run!IV.) Monopoly ProfitStep 3

QPD = ARMRMCATC

Difference between AR and ATCProfit Amount:

Q = ATCCost:

Profit-Maximizing Level

Where marginal revenue equals marginal cost MR = MCPrice:P = D = ARWhere average revenue meets the quantity producedThis is a monopoly in the Short Run and in the Long Run!IV.) Monopoly Profit

PQQPLong Run Short Run MC ATCAR=D

MRMC ATCAR=D

MRSince there are high barriers to enter the market, other firms cannot enter the market to change it.

Since a monopoly is the only seller in the market, it doesnt have to change and can charge the highest possible price all the time.

QPDMRMCProfit-Maximizing Level

MR = MCPriceP = D at MR = MCATC

Difference between AR and ATCProfit Amount

Q = ATCCost

IV.) Monopoly Profit

QPD MRMCProfit-Maximizing Level



Q = ATCCost

IV.) Monopoly ProfitProfit can be a lot




Q = ATCCost

IV.) Monopoly ProfitOr a little




Q = ATCCost

IV.) Monopoly ProfitJust connect the dots!

PQQPLong Run Short Run MC ATCD

MRMC ATCD



IV.) Monopoly Welfare Analysis

QPDMRMCATC

I will remove the ATC curve just to make this easier to read, to find allocative efficiency since it is not a main curve used to figure out surpluses, just know that it is there and makes this not all straight linesAllocative efficiencyMost desirable outcome from societys perspective IV.) Monopoly Welfare Analysis

QPD = MBMRMCMonopoly produces at profit maximizing point of MR = MCAllocative efficiency is MB = MCSo for society we make MB = D = P = MCProfit-Maximizing

MR = MCSurplus-Maximizing

P = MC

IV.) Monopoly Welfare AnalysisThese type of monopolies dont produce as much as the market really wants



P = MC

IV.) Monopoly Welfare AnalysisThey only produce to here



P = MC

Deadweight loss to societyDifference of what production society wants but Monopoly actually makesIV.) Monopoly Welfare Analysis

PQSDQQ1P1Market D + SPPerfectly Competitive FirmMC MB = MC = max efficientMC = SMB = D

ATCP=MR =AR =DI.) Perfect Competition Welfare Analysis

MC = SMB = D = PP = MC = total surplus is maximizedThis is allocative efficient

QPDMRMCAllocative efficiency is MB = MCSo for society we make MB = D = P = MCSurplus-Maximizing

P = MC

IV.) Monopoly Welfare AnalysisSame point

QPDMRMCMonopoly produces at profit maximizing point of MR = MCAllocative efficiency is MB = MCSo for society we make MB = D = P = MCProfit-Maximizing


P = MC

Deadweight loss to societyDifference of what production society wants but Monopoly actually makes


They only produce to here

QPDMRMCATC

For productive efficiency I have to leave in the ATC curve because productive efficiency is asking if the firm is producing the good or service at the most efficient point for the firm in regards to society.Productive efficiencyProducing at the most efficient possible amountIV.) Monopoly Welfare Analysis

QPDMRMCMonopoly produces at profit maximizing point of MR = MCFor society productive efficiency is Q = min ATCProfit-Maximizing


Q = min ATCATCMonopoly does not do this!IV.) Monopoly Welfare AnalysisThese type of monopolies dont produce at the cheapest point



Q = min ATCATCMonopoly does not do this!IV.) Monopoly Welfare AnalysisCost is where ATC = Q



Q = min ATC

Producer surplusHigher for Monopoly

ATCMonopoly does not do this!Consumer surplusLower for Consumer


QPDMRMCATC

Abnormal profit - YES

Productively - NOEfficient (Q = min ATC )

Allocatively - NOEfficient ( P = MC )IV.) Monopoly Welfare AnalysisMonopolies that are profit maximizing are not producing enough from a societys perspective and they are charging too high of a price

Discrimination: treating people differently based on some characteristic, e.g. race or gender.

The characteristic used in price discrimination is willingness to pay (WTP): A firm can increase profit by charging a higher price to buyers with higher WTP.

IV.) Monopoly PowerPrice Discrimination:selling the same good at different prices to different buyers.It is sometimes possible for a monopoly to charge different people difference prices

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They can charge different prices and different times when elasticity is more inelastic like during Chinese New Year

You will pay higher prices for college then others because of this price discrimination

What makes it possible:

No ability of resale

Lack of information by the consumer(asymmetric information)

Income Levels

IV.) Monopoly PowerPrice Discrimination:selling the same good at different prices to different buyers.Otherwise that means there is no monopoly of the market

Ignorance of choices though government ownership, geographical distance, etc

Richer people tend to have more inelastic demand so the decision to buy is less sensitive to price.

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Willingness to Pay (WTP)A buyers willingness to pay for a good is the maximum amount the buyer will pay for that good.WTP measures how much the buyer values the good.Example: 4 buyers WTP for an iPadRemember this?

nameWTPPeter5250Clara4500Wilson3750Key3000

**FYI: The four guys in this example are the members of the Red Hot Chili Peppers. In the corresponding example from the textbook, Mankiw uses the Beatles.

WTP and the Demand CurveAt any Q, the height of the D curve is the WTP of the marginal buyer, the buyer who would leave the market if P were any higher.PQ

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Consumer surplus example

nameW2P for iPod

Anthony$400

Chad$325

Flea$450

John$250

CS

PAnthonyChadFleaJohnQdAnthonyChadFleaJohntotal

$20011114$200$125$250$50$625

$22511114$175$100$225$25$525

$25011114$150$75$200$0$425

$27511103$125$50$175$0$350

$30011103$100$25$150$0$275

$32511103$75$0$125$0$200

$35010102$50$0$100$0$150

$37510102$25$0$75$0$100

$40010102$0$0$50$0$50

$42500101$0$0$25$0$25

$45000101$0$0$0$0$0

$47500000$0$0$0$0$0

$50000000$0$0$0$0$0

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Quantity of iPods

Price of iPods

**When Q = 1, the height of the demand curve is $300, which is Fleas willingness to pay, or how much he values an iPod. At any price higher than $300, Flea leaves the market; hence, at Q = 1, Flea is the marginal buyer.

When Q = 2, the height of the demand curve is $250, which is Anthonys willingness to pay, or how much he values an iPod. At any price higher than $250, Anthony leaves the market; hence, at Q = 2, Anthony is the marginal buyer.

And so forth.

The lesson here is summarized in the text on the right side of the screen: At each Q, the height of the D curve tells you the marginal buyers willingness to pay, or how much that buyer values the good.

About the Staircase ShapeIf we looked at a larger market with many more buyers, each would be a step on this curve D = MB =PPQDemand = Marginal Benefit

Chart1

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225

250

275

300

325

350

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400

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450

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series 1

Sheet1

Consumer surplus example

nameW2P for iPod

Anthony$400

Chad$325

Flea$450

John$250

CS

PAnthonyChadFleaJohnQdAnthonyChadFleaJohntotal

$20011114$200$125$250$50$625

$22511114$175$100$225$25$525

$25011114$150$75$200$0$425

$27511103$125$50$175$0$350

$30011103$100$25$150$0$275

$32511103$75$0$125$0$200

$35010102$50$0$100$0$150

$37510102$25$0$75$0$100

$40010102$0$0$50$0$50

$42500101$0$0$25$0$25

$45000101$0$0$0$0$0

$47500000$0$0$0$0$0

$50000000$0$0$0$0$0

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Quantity of iPods

Price of iPods

**After the previous slide, most of your students will probably understand where this D curve comes from, but its staircase-like shape will seem quite odd to them.

Point out that it has 4 steps, one for each buyer. Suppose there were 10 buyers instead of 4; how many steps would it have? Ten, of course. If there were 20 buyers, this D curve would have 20 steps.

A perfectly competitive market has a huge number of buyers. Suppose there were 10,000 buyers in the market for iPods (a tiny fraction of the actual number of buyers!). Then, the number of steps would be 10,000. In relation to the graph, each step would be insignificantly small, and the D curve would look like a smooth curve rather than a staircase even though it really is a staircase one with 10,000 infinitesimally small steps.

IV.) Monopoly Price DiscriminationQPD = ARMRMCATCPrice discriminating monopoly charges every single buyer the highest possible price each will pay Profit-Maximizing

D = MCA price discriminating monopoly will charge everyone the highest possible price they can! 4PeterClaraWilsonKey321MR = MCMR = D

IV.) Monopoly Price DiscriminationQPD =MRMCATCPrice discriminating monopoly charges every single buyer the highest possible price each will payProfit-Maximizing

MR = D = MC

Producer surplusMonopoly takes all of itConsumer surplusZero


MR = D = MC


But look! These types of monopolies are allocative efficient!

IV.) Monopoly PowerIs Price Discrimination Bad?A price discriminating monopoly will charge everyone the highest possible price they can for each person.Consumer surplus is zero, and monopolies take all of it.However because of this they will also produce more output to MC = MB which, from a societies perspective is allocative efficient and everyone that wants and values the good or service will get it, so there will no longer be a deadweight loss of not enough output.

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IV.) Monopoly


IV.) Monopoly Welfare AnalysisQPDMRMCMonopoly produces at profit maximizing point of MR = MCAllocative efficiency is MB = MCSo for society we make MB = D = P = MCProfit-Maximizing


P = MC

Deadweight loss to societyDifference of what production society wants but Monopoly actually makes

Deadweight loss

IV.) Monopoly



MR = D = MC


No Deadweight loss!

IV.) Monopoly Price DiscriminationQPD =MRMCATC



Allocatively - YESEfficient ( P = MC )

IV.) Monopoly PowerPrice Discrimination:Another way monopolies price discriminate is with Elasticity, but this doesnt change the fact that it is an inefficient producer.

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They charge different people different prices, but this also means it can make more money to have more buses

They charge different people different prices, but this also means it can make more money to have more flights

PQDQOff peak timePPeak demand (Chinese new year)Another way monopolies price discriminate is with Elasticity.

IV.) Monopoly Price DiscriminationDMRMRMCATCMCATC

They sell the same good or service without any changes to the business itself, but can make an even larger profit due to increased inelasticity of demand for the good or service

Price Discriminating summary:Monopolies can charge the maximum price that each different consumer is willing to pay which also means a monopoly will produce more and there is no longer a deadweight loss of not enough output.

Monopolies can also charge a higher price to everyone based on the elasticity of the demand.

QPDMRMCATC



Allocatively - NOEfficient ( P = MC )IV.) Monopoly Welfare Analysis

IV.) Natural Monopolies

Public goods are in theory unlimited and in making them they suffer from a problem of how much to make and who pays for them since everyone gets to enjoy it.

ExcludableNonexcludableRivalNonrivalIV.) Natural MonopoliesRemember this?

Private goodsCommon ResourceNatural Monopolies Public goods

Some goods and services work best with only a few or even one supplier as long as they act in a fair manner.ExcludableNonexcludableRivalNonrivalIV.) Natural Monopolies

Private goodsCommon ResourceNatural Monopolies Public goods

Defining the classifications: ExcludableCLASSIFYING GOODS AND RESOURCES

- it is possible to prevent a person from enjoying its benefits.And this?

- its use by one person does not decrease the quantity available to someone else.CLASSIFYING GOODS AND RESOURCESAnd this?

IV.) Natural Monopolies- It occurs when one large business can supply the entire market at a lower price than two or more smaller ones- A natural monopoly is a situation in which there cannot be more than one efficient provider of a good. In this situation, competition might actually increase costs and prices- The key point is that a natural monopoly is characterized by increasing returns to scale at all levels of output

Can you imagine having 50 water companies with 50 sets of pipes instead of just 1 set?

Its more natural to have only one company do this

Also often this too

How ATC Changes as the Scale of Production ChangesEconomies of scale: ATC falls as Q increases. Constant returns to scale: ATC stays the same as Q increases.Diseconomies of scale: ATC rises as Q increases. Other typical markets:

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How ATC Changes as the Scale of Production ChangesEconomies of scale: ATC falls as Q increases. IV.) Natural MonopoliesThe bigger it get the costs get cheaper at typically continue to get cheaper

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-Three types Non-Price Discriminating Price Discriminating Natural Monopoly-Then regulating monopolies Short summary of what we will looked at

IV.) MonopolyMarket Structure

PQQPLong Run Short Run MC ATCD

MRMC ATCD



QPDMRMCATC



Allocatively - NOEfficient ( P = MC )IV.) Monopoly Welfare Analysis

IV.) Natural Monopolies- It occurs when one large business can supply the entire market at a lower price than two or more smaller ones- A natural monopoly is a situation in which there cannot be more than one efficient provider of a good. In this situation, competition might actually increase costs and prices- The key point is that a natural monopoly is characterized by increasing returns to scale at all levels of output

Price Discrimination - Bad for consumers and high prices

Not efficient from a societys perspective - Does not produce as much as people want

Loses the Incentives to Innovate -Monopoly might not innovate because it doesnt have to.Downsides of a Monopoly

IV.) Monopoly summary

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Price Discrimination - Good for Society as more is produced

Capturing Economies of Scale-Economies of scale can lead to natural monopoly.-It is more efficient to regulate natural monopoly than to break it up and make the industry competitive.

Strengthening the Incentives to Innovate- Monopoly might be more innovative than competition.-Innovation can create a monopoly.Benefits of a Monopoly

IV.) Monopoly summary

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Next is regulation of Monopolies.

But now thats allThanks

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*When the AR column appears, note that AR = P at every quantity. This, of course, is a tautology.


For example, in the range of output of Q=2 to Q=3, the price ranges from $3.50 to $3.00, but MR is only $2.*When the AR column appears, note that AR = P at every quantity. This, of course, is a tautology.


For example, in the range of output of Q=2 to Q=3, the price ranges from $3.50 to $3.00, but MR is only $2.**The numbers in the table are from the preceding exercise. Students can see either from the table or the graph that, at any Q, MR < P. **The numbers in the table are from the preceding exercise. Students can see either from the table or the graph that, at any Q, MR < P. **The numbers in the table are from the preceding exercise. Students can see either from the table or the graph that, at any Q, MR < P. **Note that a competitive firm has the output effect but not the price effect: the competitive firm does not need to reduce its price in order to sell a larger quantity, so, for the competitive firm, MR = P. *

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**ing**FYI: The four guys in this example are the members of the Red Hot Chili Peppers. In the corresponding example from the textbook, Mankiw uses the Beatles. **When Q = 1, the height of the demand curve is $300, which is Fleas willingness to pay, or how much he values an iPod. At any price higher than $300, Flea leaves the market; hence, at Q = 1, Flea is the marginal buyer.

When Q = 2, the height of the demand curve is $250, which is Anthonys willingness to pay, or how much he values an iPod. At any price higher than $250, Anthony leaves the market; hence, at Q = 2, Anthony is the marginal buyer.

And so forth.

The lesson here is summarized in the text on the right side of the screen: At each Q, the height of the D curve tells you the marginal buyers willingness to pay, or how much that buyer values the good. **After the previous slide, most of your students will probably understand where this D curve comes from, but its staircase-like shape will seem quite odd to them.

Point out that it has 4 steps, one for each buyer. Suppose there were 10 buyers instead of 4; how many steps would it have? Ten, of course. If there were 20 buyers, this D curve would have 20 steps.

A perfectly competitive market has a huge number of buyers. Suppose there were 10,000 buyers in the market for iPods (a tiny fraction of the actual number of buyers!). Then, the number of steps would be 10,000. In relation to the graph, each step would be insignificantly small, and the D curve would look like a smooth curve rather than a staircase even though it really is a staircase one with 10,000 infinitesimally small steps. **

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