AP Micro Pure Monopoly

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AP Micro Pure Monopoly

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

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