Unit 4: Imperfect

Competition

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REVIEW ACTIVITYName That Concept

Rules: 1. Cannot use the word(s)2. Focus on the concept not word

Ex: Price Maker2Copyright

ACDC Leadership 2015

Name That Concept

1. Monopoly2. Imperfect Competition3. Barriers to Entry4. Dead Weight Loss5. Productive Efficiency

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Name That Concept

1. Marginal Revenue2. MR = MC3. Shut down rule4. Natural Monopoly 5. Allocative Efficiency

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D

MR

$10

9

8

7

6

5

MCATC

516 17 18 19 20 Q

P

How much is the TR, TC and Profit or Loss?

Profit =$20

Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve.

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Elastic and Inelastic Range

6Q

$15

10

5

$64

40

20

TR

D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MR

P

TR

Total Revenue TestIf price falls and TR

increases then demand is elastic.

Elastic

Total Revenue TestIf price falls and

TR falls then demand is inelastic.

A monopoly will only

produce in the elastic

range

Inelastic

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Regulating Monopolies

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How do they regulate?•Use Price controls: Price Ceilings•Why don’t taxes work?

•Taxes limit supply and that’s the problem

Why Regulate?Why would the government regulate

an monopoly? 1. To keep prices low 2. To make monopolies efficient

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1.Socially Optimal PriceP = MC (Allocative Efficiency)

Where should the government place the price ceiling?

2. Fair-Return Price (Break–Even)

P = ATC (Normal Profit)

OR

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QD

MC

ATC

P

Natural Monopoly

10Qsocially optimal

One firm can produce the socially optimal quantity at the lowest cost due to economies scale.

It is better to have only one firm because ATC

is falling at socially optimal quantity

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MR

QDMR

MC

ATC

P

Natural Monopoly

11Qsocially optimalCopyright ACDC Leadership 2015

Unregulated

Socially Optimal(No DWL)

Fair Return

QM QFR

PM

PFR

QSO

QD

MC

ATC

P

Regulating a Natural Monopoly

12Qsocially optimal

What happens if the government sets a price ceiling to get the socially optimal quantity?

The firm would make a loss and would require

a subsidy

Pso

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MR

2008 Audit Exam

Perfect Price Discrimination

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Price DiscriminationPrice Discrimination:Practice of selling the same products to different buyers at different prices

•Airline Tickets (vacation vs. business)•Movie Theaters (child vs. adult) •All Coupons (spenders vs. savers) •SPHS football games (students vs. parents)

Examples:

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•Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.•Those with inelastic demand are charged more than those with elastic

Requires the following conditions:1. Must have monopoly power2. Must be able to segregate the market 3. Consumers must NOT be able to resell

product16Copyright

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Price Discrimination

P Qd TR MR

$11 0 0 -

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 9$10 $9

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 9

$8 3 27 8$10 $9

$10 $9 $8

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 9

$8 3 27 8

$7 4 34 7

$10 $9

$10 $9 $8

$10 $9 $8 $7

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 $9

$8 3 27 $8

$7 4 34 $7

$6 5 40 $6

$5 6 45 $5

$4 7 49 $4

Results of Price Discrimination

$10 $9

$10 $9 $8

$10 $9 $8

$10 $9 $8 $7

$7

$6

$5$10 $9 $8 $7 $6

$10 $9 $8 $7 $6 $5 $422Copyright

ACDC Leadership 2015

$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 $9

$8 3 27 $8

$7 4 34 $7

$6 5 40 $6

$5 6 45 $5

$4 7 49 $4

$10 $9

$10 $9 $8

$10 $9 $8

$10 $9 $8 $7

$7

$6

$5$10 $9 $8 $7 $6

$10 $9 $8 $7 $6 $5 $4

WHEN PRICE DISCIMINATING

MR = D

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Regular Monopoly vs. Price Discriminating Monopoly

24

D

MR

MC

ATC

Q

P

Pm

QmCopyright ACDC Leadership 2015

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

25

D

MR

MC

ATC

Q

P

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26

D=MR

MC

ATC

Q

P

Qnm

Identify the Price, Profit, CS, and DWL

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

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27

D=MR

MC

ATC

Q

P

Qnm

Identify the Price, Profit, CS, and DWL

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

Price Discrimination results in several prices, more profit, no CS, and a higher

socially optimal quantityCopyright ACDC Leadership 2015

Can You Do The Following?

1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit.

3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit

2. Draw a perfectly competitive industry AND firm at long-run equilibrium

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