sayre | morris seventh edition monopoly chapter 10 10-1© 2012 mcgraw-hill ryerson limited
TRANSCRIPT
SAYRE | MORRIS Seventh Edition
Monopoly
CHAPTER 10
10-1© 2012 McGraw-Hill Ryerson Limited
Learning Objectives:
Monopoly
LO1: Define a monopoly, explain how they come into existence and why they must reduce their prices to sell more
LO2: Understand how the profit-maximizing output and price are determined for a monopolist
LO3: Explain five grounds on which monopolies can be criticized
LO4: Explain the significant difference between monopoly and perfect competition
CHAPTER 10
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Learning Objectives:
Monopoly
LO5: Explain three grounds on which monopolies can be defended
LO6: Discuss ways that governments can change the behaviour of monopolies
CHAPTER 10
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Monopoly • a market in which a single firm (the monopolist) is
the sole producer
• protected from new competitors by barriers to entry
Barriers to Entry • obstacles that make it difficult for new participants
to enter a market
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LO1
Monopoly
1. technical barriers such as sole ownership of a resource
2. legal barriers such as public franchise, licences, patents, and copyrights
3. economic barriers caused by economies of scale
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LO1
Barriers to Entry
Self-Test
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Entry into the following industries is very difficult. What type of barrier to entry is involved?
a) Computer operating systems
b) Commercial aircraft manufacturing
c) West coast wild salmon fishing
LO1
Self-Test
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Entry into the following industries is very difficult. What type of barrier to entry is involved?
a) Computer operating systems
b) Commercial aircraft manufacturing
c) West coast wild salmon fishing
LO1
technical barrier (sole ownership of a resource)
economic barrier (economies of scale)
legal barrier (licence fee required)
• able to set price rather than having to accept the market-determined price
• can set either price or quantity sold, but not both
• since the monopolist is the industry, it faces the market demand for the product
• demand is a downward-sloping curve
• must decrease the price in order to sell more
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LO1
Monopoly
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LO1
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LO1
• In order to increase sales, a monopolist is forced to reduce price not just on the last units sold, but on the whole of its output
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LO1
• Total revenue is maximized when the marginal revenue is zero
• a monopolist will produce only where the demand is elastic
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LO1
Monopoly
Self-Test
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Suppose a monopolist was charging a price of $50 for its product and was selling 15 units. It has now lowered its price to $48 and is selling 16 units. What is the marginal revenue? What is the price elasticity of demand over this price range?
LO1
Self-Test
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Suppose a monopolist was charging a price of $50 for its product and was selling 15 units. It has now lowered its price to $48 and is selling 16 units. What is the marginal revenue? What is the price elasticity of demand over this price range?
LO1
Marginal revenue: $18.
Total revenue at a price of $50 is $750 (15 x $50). Total revenue at a price of $48 is $768 (16 x $48) The extra unit produces extra total revenue of $18 ($768 – $750).
Elasticity: e = % D Q= 1/15.5 x 100 = 6.5% = 1.59 % D P 2/49 x 100 4.1
Total Revenue Approach • maximum profit is where the difference between total
revenue (TR) and total cost (TC) is greatest
• the maximum profit point is shown on the total profit curve, where it occurs at the highest point.
• the maximum profit point also occurs where the slope of TR (same as MR) equals the slope of TC (same as MC)
• the break-even points occur where total revenue and cost are the same
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LO2
Maximizing Profit
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LO2
10-16
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LO2
10-17
Marginal Revenue Approach • profits are maximized (or losses minimized) at an
output where MR MC
• same profit maximization rule as perfectly competitive firms
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LO2
Maximizing Profit
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LO2
10-19
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LO2
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• monopolists are not always profitable
• depends on costs – if AC curve is higher than the demand curve at all output levels, will have a loss
• Can minimize loss using the profit maximization rule
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LO2
Minimizing Loss
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LO2
10-22
Self-Test
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Complete the following table and indicate the break-even outputs and the profit maximizing output:
LO2
Quantity Price (=AR)
Total Revenue (TR)
Total Costs (TC)
Total Profit (Tπ)
20 $100 $206021 98 208022 96 211223 94 214224 92 217725 90 221626 88 225727 86 232228 84 241729 82 2530
Self-Test
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Complete the following table and indicate the break-even outputs and the profit maximizing output:
LO2
Break-even (TR=TC) occur at 22 and 27. Profit-maximizing output occurs at an output of 25
Quantity Price (=AR)
Total Revenue (TR)
Total Costs (TC)
Total Profit (Tπ)
20 $100 2 000 $2060 ‑6021 98 2 058 2080 ‑2222 96 2 112 2112 023 94 2 162 2142 2024 92 2 208 2177 3125 90 2 250 2216 3426 88 2 288 2257 3127 86 2 322 2322 028 84 2 352 2417 ‑6529 82 2 378 2530 ‑152
1. able to make economic profits indefinitely
2. are both productively and allocatively inefficient
3. produce less and charge a higher price than a competitive industry
4. creating a more unequal distribution of income and wealth within society
5. using their power to practice price discrimination
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LO3
Criticisms of Monopolies
Self-Test
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The following table shows the demand for haircuts:
a) If this was a single-price barber, what would be the total revenue for six haircuts? b) If this barber was able to practice perfect price discrimination by charging each customer the maximum they would pay, what would be the total revenue for six haircuts?
LO3
Price Quantity
$20 1
19 2
18 3
17 4
16 5
15 6
Self-Test
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The following table shows the demand for haircuts:
a) If this was a single-price barber, what would be the total revenue for six haircuts? b) If this barber was able to practice perfect price discrimination by charging each customer the maximum they would pay, what would be the total revenue for six haircuts?
LO3
TR $90 ($15 x 6)
Price Quantity
$20 1
19 2
18 3
17 4
16 5
15 6
TR $105 ($20 + $19 + $18 + $17 + $16 + $15)
• Monopolies charge higher prices than perfectly competitive firms.
• Monopolies produce lower outputs than perfectly competitive firms and these outputs are below economic capacity.
• Monopolies, unlike perfectly competitive firms, may make economic profits in the short run and in the long run.
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LO4
Perfect Competition v Monopoly
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LO4
10-29
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LO4
10-30
Self-Test
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a) If the graph opposite depicts a competitive market, what is the equilibrium price and quantity?
b) If the graph opposite depicts a monopolist, what is the equilibrium price and quantity?
LO4
Self-Test
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a) If the graph opposite depicts a competitive market, what is the equilibrium price and quantity?
b) If the graph opposite depicts a monopolist, what is the equilibrium price and quantity?
LO4
Price: $30; Quantity: 300
Price: $40; Quantity: 200
1. They capture large economies of scale in production.
2. They engage in extensive research and development into new techniques of production and new products.
3. They attract high-quality staff by offering relatively high wages and good working conditions.
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LO5
Defence of Monopolies
• single producer who is able to produce at a lower
cost than competing firms could
• usually in a market with large economies of scale
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LO5
Natural Monopoly
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LO4
10-35
• goods or services regarded as essential and
therefore usually provided by government
• competition may well be costly and wasteful
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LO5
Public Utilities
Self-Test
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In Figure 10.9 opposite, suppose there are two competing rail companies, each with 50 % of the market. What would be the profit or loss for each if they both charged $1.50?
LO5
Self-Test
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In Figure 10.9 opposite, suppose there are two competing rail companies, each with 50 % of the market. What would be the profit or loss for each if they both charged $1.50?
LO5
At $1.50 the quantity demanded is 100 000, or 50 000 each. The average cost of servicing 50 000 riders is $2.50. This means that each company would lose $1.00 for each fare, for a total loss of $50 000 per day.
Some options:
• Taxing the monopolist
• Government price setting
• Nationalization
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LO6
Government Control
Lump sum Profits Tax: • affects fixed cost but not variable cost
• increases average cost but marginal cost is unaffected
• output and price levels are unaffected
• lower profit (due to higher costs)
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LO6
Taxing the Monopolist
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LO6
10-41
Monopoly Sales Tax: • tax on each unit sold
• increases marginal cost
• profit maximizing point shifts
• part of the tax is shifted to consumer in the form of higher price
• lower quantity is produced
• monopolist’s profit is reduced
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LO6
Taxing the Monopolist
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LO6
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Socially Optimum Price • the price that produces the best allocation of
products (and therefore resources) from society’s point of view, that is, P MC
Fair-Return Price • a price that guarantees that the firm will earn
normal profits only, that is, where P AC
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LO6
Government Price Setting
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LO6
10-45
Self-Test
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On the graph, indicate:a) Price (PUM) and quantity (QUM) if monopolist is unregulated
b) Price (PSO) and quantity (QSO) if monopolist charges the socially optimum price
c) Price (PFR) and quantity (QFR) if monopolist charges fair-return price
LO6
Self-Test
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On the graph, indicate:a) Price (PUM) and quantity (QUM) if monopolist is unregulated
b) Price (PSO) and quantity (QSO) if monopolist charges the socially optimum price
c) Price (PFR) and quantity (QFR) if monopolist charges fair-return price
LO6
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• Types of barriers to entry
• Profit maximization for a monopolist
• Criticisms of monopolies
• Defences of monopolies
• Ways that governments can control monopolies
Chapter 10 Summary