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AP Micro Pure Monopoly

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    AP Micro  Pure Monopoly AP Micro Pure Monopoly Presentation Transcript

    • 24
      C H A P T E R
      Pure Monopoly
    • FOUR MARKET MODELS
      Pure
      Monopoly
      Pure
      Competition
      Monopolistic
      Competition
      Oligopoly
      Market Structure Continuum
      Pure Monopoly:
      • Single Seller
      • No Close Substitutes
      • Price Maker
      • Blocked Entry
      • Nonprice Competition
    • MONOPOLY EXAMPLES
      Pure Monopoly
      Regulated Monopoly
      Near Monopolies
      Dual Objectives of the Study
      • Monopoly as a Market Structure
      • To Better Understand Other Market Structures
    • BARRIERS TO ENTRY
      Economies of Scale
      • The Natural Monopoly Case
      • Minimum Efficient Scale
      Legal Barriers to Entry
      • Patents
      • Licenses
      Ownership or Control of Essential Resources
      Pricing and Other Strategic Barriers to Entry
    • THE NATURAL MONOPOLY CASE
      $20
      15
      ATC
      Average Total Cost
      10
      If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly.
      0
      50
      100
      200
      Quantity
    • MONOPOLY DEMAND
      3 Basic Assumptions:
      • Monopoly Status is Secure
      • No Governmental Regulation
      • Firm Charges the Same Price for all Units Sold
      Market Demand Curve is the Firm’s Demand Curve
    • MONOPOLY DEMAND
      P
      As price decreases from
      $142 to $132...
      but revenue will
      increase with the
      additional
      unit sold.
      $142
      132
      Loss = $30
      D
      Gain = $132
      Q
      1 2 3 4 5 6
    • MONOPOLY DEMAND
      Marginal Revenue
      $142 - $30 = $102
      will necessarily be
      less than price $132
      P
      As price decreases from
      $142 to $132...
      but revenue will
      increase with the
      additional
      unit sold.
      $142
      132
      Loss = $30
      D
      Gain = $132
      Q
      1 2 3 4 5 6
    • MONOPOLY REVENUES & COSTS
      Revenue Data
      Cost Data
      Quantity
      of
      Output
      Price
      (Average
      Revenue)
      Profit +
      or
      loss -
      Average
      Total
      Cost
      Marginal
      Revenue
      Total
      Revenue
      Marginal
      Cost
      Total
      Cost
      -
      x
      0
      $172
      $ 0
      - $100
      $100
      =
      =
    • MONOPOLY REVENUES & COSTS
      ]
      ]
      Revenue Data
      Cost Data
      Quantity
      of
      Output
      Price
      (Average
      Revenue)
      Profit +
      or
      loss -
      Average
      Total
      Cost
      Marginal
      Revenue
      Total
      Revenue
      Marginal
      Cost
      Total
      Cost
      0
      $172
      $ 0
      - $100
      $100
      0
      1
      $172
      162
      $ 0
      162
      - $100
      - 28
      $100
      190
      90
      $162
      -
      x
      =
      =
      $190.00
      MC = $190 – 100 = $90
      MR = $162 – 0 = $162
      MR > MC
      Loss Improvement
      from -$100 to -$28
      Check next unit of
      output!
    • MONOPOLY REVENUES & COSTS
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      Revenue Data
      Cost Data
      Quantity
      of
      Output
      Price
      (Average
      Revenue)
      Profit +
      or
      loss -
      Average
      Total
      Cost
      Marginal
      Revenue
      Total
      Revenue
      Marginal
      Cost
      Total
      Cost
      0
      1
      2
      3
      4
      5
      6
      7
      8
      9
      10
      $172
      162
      152
      142
      132
      122
      112
      102
      92
      82
      72
      $ 0
      162
      304
      426
      528
      610
      672
      714
      736
      738
      720
      - $100
      - 28
      + 34
      + 86
      + 128
      + 140
      + 122
      + 74
      - 14
      - 142
      - 310
      $100
      190
      270
      340
      400
      470
      550
      640
      750
      880
      1030
      90
      80
      70
      60
      70
      80
      90
      110
      130
      150
      $162
      142
      122
      102
      82
      62
      42
      22
      2
      - 18
      $190.00
      135.00
      113.33
      100.00
      94.00
      91.67
      91.43
      93.73
      97.78
      103.00
    • MONOPOLY REVENUES & COSTS
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      Revenue Data
      Cost Data
      Quantity
      of
      Output
      Price
      (Average
      Revenue)
      Profit +
      or
      loss -
      Average
      Total
      Cost
      Marginal
      Revenue
      Total
      Revenue
      Marginal
      Cost
      Total
      Cost
      Can you see profit
      maximization?
      0
      1
      2
      3
      4
      5
      6
      7
      8
      9
      10
      $172
      162
      152
      142
      132
      122
      112
      102
      92
      82
      72
      $ 0
      162
      304
      426
      528
      610
      672
      714
      736
      738
      720
      - $100
      - 28
      + 34
      + 86
      + 128
      + 140
      + 122
      + 74
      - 14
      - 142
      - 310
      $100
      190
      270
      340
      400
      470
      550
      640
      750
      880
      1030
      MR > = MC
      90
      80
      70
      60
      70
      80
      90
      110
      130
      150
      $162
      142
      122
      102
      82
      62
      42
      22
      2
      - 18
      $190.00
      135.00
      113.33
      100.00
      94.00
      91.67
      91.43
      93.73
      97.78
      103.00
    • ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      ]
      MONOPOLY REVENUES & COSTS
      Revenue Data
      Cost Data
      Quantity
      of
      Output
      Price
      (Average
      Revenue)
      Profit +
      or
      loss -
      Average
      Total
      Cost
      Marginal
      Revenue
      Total
      Revenue
      Marginal
      Cost
      Total
      Cost
      0
      1
      2
      3
      4
      5
      6
      7
      8
      9
      10
      $172
      162
      152
      142
      132
      122
      112
      102
      92
      82
      72
      $ 0
      162
      304
      426
      528
      610
      672
      714
      736
      738
      720
      - $100
      - 28
      + 34
      + 86
      + 128
      + 140
      + 122
      + 74
      - 14
      - 142
      - 310
      $100
      190
      270
      340
      400
      470
      550
      640
      750
      880
      1030
      90
      80
      70
      60
      70
      80
      90
      110
      130
      150
      $162
      142
      122
      102
      82
      62
      42
      22
      2
      - 18
      $190.00
      135.00
      113.33
      100.00
      94.00
      91.67
      91.43
      93.73
      97.78
      103.00
    • MONOPOLY REVENUES & COSTS
      $200
      150
      200
      50
      Dollars
      Q
      0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
      $750
      500
      250
      Dollars
      Q
      0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
    • MONOPOLY REVENUES & COSTS
      Elastic
      $200
      150
      200
      50
      Dollars
      MR
      D
      Q
      0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
      $750
      500
      250
      Dollars
      TR
      Q
      0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
    • MONOPOLY REVENUES & COSTS
      Inelastic
      Elastic
      $200
      150
      200
      50
      Dollars
      MR
      D
      Q
      0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
      $750
      500
      250
      Dollars
      TR
      Q
      0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
    • OUTPUT AND PRICE DETERMINATION
      Cost Data
      MR = MC Rule
      No Monopoly Supply Curve
      Monopoly Pricing Misconceptions
      • Not Highest Price
      • Total, Not Unit, Profit
      • Possibility of Losses
      Graphically…
    • OUTPUT AND PRICE DETERMINATION
      200
      175
      150
      125
      100
      75
      50
      25
      Price, costs, and revenue
      Q
      0 1 2 3 4 5 6 7 8 9 10
      Profit Maximization Under Monopoly
      Remember the MR=MC Rule?
      Profit
      Per Unit
      MC
      $122
      Profit
      ATC
      $94
      D
      MR = MC
      MR
    • OUTPUT AND PRICE DETERMINATION
      200
      175
      150
      125
      100
      75
      50
      25
      What About
      Loss Minimization?
      Price, costs, and revenue
      Q
      0 1 2 3 4 5 6 7 8 9 10
      Profit Maximization Under Monopoly
      Profit
      Per Unit
      MC
      $122
      Profit
      ATC
      $94
      D
      MR = MC
      MR
    • OUTPUT AND PRICE DETERMINATION
      Since Pm exceeds AVC,
      the firm will produce
      200
      175
      150
      125
      100
      75
      50
      25
      Price, costs, and revenue
      Q
      0 1 2 3 4 5 6 7 8 9 10
      Loss Minimization Under Monopoly
      Loss
      Per Unit
      MC
      ATC
      A
      Loss
      AVC
      Pm
      V
      D
      MR = MC
      MR
      Qm
    • OUTPUT AND PRICE DETERMINATION
      200
      175
      150
      125
      100
      75
      50
      25
      What are the
      Economic Effects
      of Monopoly?
      Price, costs, and revenue
      Q
      0 1 2 3 4 5 6 7 8 9 10
      Loss Minimization Under Monopoly
      Loss
      Per Unit
      MC
      ATC
      A
      Loss
      AVC
      Pm
      V
      D
      MR = MC
      MR
      Qm
    • INEFFICIENCY OF PURE MONOPOLY
      An industry in pure competition
      sells where supply and
      demand are equal
      P
      S = MC
      At MR=MC
      A monopolist
      will sell less
      units at a
      higher price
      than in
      competition
      Pm
      Pc
      D
      MR
      Q
      Qc
      Qm
    • INEFFICIENCY OF PURE MONOPOLY
      P
      S = MC
      At MR=MC
      A monopolist
      will sell less
      units at a
      higher price
      than in
      competition
      Monopoly pricing effectively
      creates an income transfer from
      buyers to the seller!
      Pm
      Pc
      D
      MR
      Q
      Qc
      Qm
    • COST COMPLICATIONS
      X
      ATCx
      Average
      Total Costs
      X’
      ATC1
      Average total costs
      ATCx’
      ATC2
      Q2
      Q1
      Quantity
      Economies of Scale
      Simultaneous Consumption
      Network Effects
      X-Inefficiency
      Inefficient internal
      operation leads to
      higher-than-
      necessary costs
    • COST COMPLICATIONS
      Economies of Scale
      Simultaneous Consumption
      Network Effects
      X-Inefficiency
      Rent-Seeking Expenditures
      Rent-Seeking Behavior
      Technological Advance
      Assessment and Policy Options
      Antitrust Action
      Regulate Natural Monopoly
      Ignore it, if it is Short-Lived
    • PRICE DISCRIMINATION
      Conditions
      Monopoly Power
      Market Segregation
      No Resale
      Consequences
      More Profit
      More Production
      Graphically…
    • PRICE DISCRIMINATION
      MC
      Economic profits with
      a single MR=MC
      price
      P
      ATC
      Price and Costs
      D
      MR
      Q
      Q1
    • PRICE DISCRIMINATION
      A perfectly discriminating
      monopolist has MR=D,
      producing more product
      and more profit!
      MC
      P
      ATC
      Price and Costs
      MR=D
      D
      Q
      Q1
      Q2
    • PRICE DISCRIMINATION
      MC
      Economic profits with
      price discrimination
      P
      ATC
      Price and Costs
      MR=D
      D
      Q
      Q1
      Q2
    • REGULATED MONOPOLY
      Natural Monopolies
      Rate Regulation
      Socially Optimum Price
      P = MC
      Fair-Return Price
      P = ATC
      Dilemma of Regulation
      Graphically…
    • REGULATED MONOPOLY
      Monopoly Price
      MR = MC
      P
      Pm
      Price and Costs
      ATC
      MC
      D
      MR
      Q
      Qm
    • REGULATED MONOPOLY
      P
      Fair-Return Price
      Normal Profit Only
      Price and Costs
      ATC
      Pf
      MC
      D
      MR
      Q
      Qf
    • REGULATED MONOPOLY
      P
      Socially-Optimum
      Price
      P = MC
      Price and Costs
      ATC
      MC
      Pr
      D
      MR
      Q
      Qr
    • REGULATED MONOPOLY
      Dilemma of Regulation
      Which Price?
      P
      MR = MC
      Fair-Return Price
      Pm
      Socially-Optimum
      Price
      Price and Costs
      ATC
      Pf
      MC
      Pr
      D
      MR
      Q
      Qm
      Qf
      Qr
    • Next
      Monopolistic
      Competition
      & Oligopoly
      Chapter 25