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Chap6

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  • 1. CHAPTER 6 MARKET STRUCTURE: MONOPOLY
  • 2.
    • 6.1 Characteristic
    • 6.2 Barriers to Entry
    • 6.3 Short-run Decision: Profit Maximization
    • 6.4 Short-run Decision: Minimizing Loss
    • 6.5 Long-run Profit Maximization & Misconception
    • 6.6 Social Cost of Monopoly
    • 6.7 Price Discrimination
  • 3.
    • Definition:
      • Existence of a single seller in the market who produces goods that have no substitutes .
      • An industry with a single firm in which the entry of new firms is blocked .
      • For example: Microsoft, Tenaga Nasional Berhad.
  • 4.
    • One seller and large number of buyers :
      • Firm supply is equal to the whole market/industry supply.
      • The monopolist is a firm as well as an industry in itself.
    • Product has no close substitute :
      • Unique product with no competition.
    • Price maker :
      • Monopoly can influence either the market price or quantity supplied.
      • Constraint by demand behavior of consumers.
    • Barriers to entry :
      • Heavy restrictions or barriers. Barrier to entry is legal or natural constraints that protect a firm from potential competitors.
    6.1 Characteristic
  • 5.
    • Definition :
      • legal or natural constraints that protect a firm from potential competitors.
      • The existence of monopoly in the long run is depends on the barriers to entry.
    • The following are some common types of barriers :
      • Control over raw material
      • Patent and copyright
      • Cost of establishing an efficient plant
      • Government franchises
    6.2 Barriers to Entry?
  • 6.
    • Control over raw material
      • A monopoly status can be maintained through control over the supply of raw materials
      • For example: China is the monopoly supplier of pandas.
    • Patents or copyrights
      • A patent is an exclusive right to the production of an innovative product.
      • A copyright is an exclusive right to the author, of a book or a composer of a music or producer of a movie.
      • The owner of the patent and the copyright has a monopoly over that particular product but its valid foar a limited time period only and the monopoly will expire in due course.
    Types of Barriers to Entry
  • 7.
    • Cost of establishing an efficient plant
      • This is the case of natural monopoly.
      • A natural monopoly exists when one firm can meet the entire market demand at a lower price as compared to two or more firms.
      • Example; TNB
    • Government franchises
      • The government will give an exclusive rights to a firm to sell certain goods and services in certain area.
      • Example; the government has given the right to install the satellite television system to ASTRO in Malaysia.
    Types of Barriers to Entry
  • 8.
    • The firm’s demand curve represents the industry demand curve since there is only one producer in a monopoly.
    • The demand curve for the output in monopoly is downward sloping.
    • Marginal revenue curve below the demand curve. It is twice as steep as the demand curve.
    Market Demand and Marginal Revenue
  • 9. For a monopolist, an increase in output involves not just producing more and selling it, but also reducing the price of its output to sell it. TABLE 13.1 Marginal Revenue Facing a Monopolist (1) QUANTITY (2) PRICE (3) TOTAL REVENUE (4) MARGINAL REVENUE 0 $11 0  1 10 $10 $10 2 9 18 8 3 8 24 6 4 7 28 4 5 6 30 2 6 5 30 0 7 4 28  2 8 3 24  4 9 2 18  6 10 1 10  8
  • 10. FIGURE 13.3 Marginal Revenue Curve Facing by Monopolist
  • 11.
    • The monopolist will fix a higher price if demand is inelastic and a lower price if demand is elastic.
    • When demand is elastic (Ed >1):
      • a decrease in price increases total revenue
      • marginal revenue is positive
    • When demand is unitary/ unit elastic (Ed = 1):
      • Total revenue is maximum
      • Marginal revenue will is zero (intersect with quantity).
    • When demand is inelastic (Ed < 1):
      • a decrease in price reduces total revenue
      • marginal revenue is negative
    Demand Curve and Elasticity of Demand
  • 12. (b) Total Revenue $60,000 0 16 32 Total revenue $3,750 0 16 32 Marginal revenue Elastic (Ed > 1) Inelastic (Ed < 1) Unit elastic (Ed =1) D = Average revenue 1-carat diamonds per day (a) Demand and Marginal Revenue $ per diamond Dollars 1-carat diamonds per day Demand Curve and Elasticity of Demand ↓ Inelastic -ve Maximum Unitary Elastic 0 ↑ Elastic +ve TR PED MR
  • 13.
    • MR = MC
      • Profit maximizing output
      • No incentive to change the output.
    • MR < MC
      • it would pay for the firm to decrease output as the saving in cost would be bigger than loss in revenue
    • MR > MC
      • additional revenue will more than additional cost, thus it would be better off for the firm to increase output
    The monopolist is a price maker because can select the price that maximizes profit. 6.3 Short-run Decision: Profit Maximization
  • 14.
    • In the short run, a monopolist firm can earn supernormal profit, normal profit, or subnormal profit.
    • Supernormal profit :
      • Profit that earned by a firm when its (TR > TC) or (P > ATC).
    • Normal profit:
      • Profit that earned by firm when its (TR = TC) or (P = ATC)
    • Subnormal profit:
      • Profit that earned by firm when its (TR < TC) or (P < ATC)
    Short-run Decision: Profit Maximization
  • 15. Supernormal Profit Quantity Price P PROFIT DD = AR MR ATC MC ATC Q M
    • TR > TC
    • P > ATC
    TR TC
  • 16. Normal Profit Quantity Price P = ATC DD = AR MR ATC MC Q M
    • TR = TC
    • P = ATC
    TR TC
  • 17. Normal Profit Quantity Price P DD = AR MR ATC MC Q M
    • TR < TC
    • P < ATC
    TR TC ATC LOSS
  • 18.
    • Firm suffer losses:
      • Average revenue less than average total cost.
    • The monopolist will continue to produce rather than shut down in the short run because price exceeds average variable cost.
      • Despite having market power, the monopolist still constraint to either setting the price or output only, not both.
    6.4 Short-run Decision: Minimizing Loss
  • 19. p Marginal cost Average total cost Average variable cost Demand = Average revenue Marginal revenue 0 Q e c b a Loss Quantity per period
    • Marginal revenue equals marginal cost at point e .
    • At quantity Q, price p (at point b ) is less than average total cost (at point a )
    • The monopolist suffers a loss.
    • But the monopolist will continue to produce rather than shut down in the short run because price exceeds average variable cost (at point c ).
    Dollars per unit
  • 20.
    • Long-run is the time period in which the firm can adjust its input used in the production.
    • A monopolist firm in the long-run is also in equilibrium at a point where MR = MC .
    • A monopolist that earns economic profit in the short-run may find that profit can be increased in the long run by adjusting the scale of the firm.
    • A monopoly that suffers a loss in the short run may be able to eliminate that loss in the long run by adjusting to a more efficient size
    6.5 Long Run Profit Maximization
  • 21. Misconception Monopolist CAN earn positive economic profit in the long run. Monopolist seek to maximize PROFIT . Monopolist has BOTH good and bad to the market/society. Monopolist ALWAYS earn positive economic profit in the long run. Monopolist seek to maximize PRICE . Monopolist ALWAYS bad to the market/society. True Wrong
  • 22.
    • Deadweight loss
      • The result of not producing at price equal to marginal cost like in perfect competitive market structure.
    • Price discrimination
      • behavior that transfer income or surplus from consumers to the monopolist.
    • Rent-seeking
      • behavior to preserve positive profits @ action taken by household & firms to preserve positive profit.
    6.6 Social Cost of Monopoly
  • 23. Deadweight Loss A B C D E
  • 24. Try this!! Deadweight Loss???? Producer Surplus Total Surplus Consumer Surplus Changes Monopoly Perfect Competitive
  • 25.
    • Definition :
      • Charging different prices to different buyers for the same good or different prices for the same good on different units sold.
    • Conditions :
      • Monopoly Power :
        • The sellers must be a monopolist or at least must posses some ability to control output and price.
      • No resale:
        • Ability to prevent those who pay the lower price from reselling the product to those who pay the higher price.
      • Market Segregation:
        • Identify and separate different buyers based on different elasticity of demand.
    6.7 Price Discrimination
  • 26.
    • Types of Price Discrimination:
      • First-degree price discrimination
        • Occurs when a firm charges different prices for each unit sold and charges each consumer the maximum price that he/she is willing to pay.
        • Example: Product that sold in auction  antique goods, artwork, car or house.
      • Second-degree price discrimination
        • The monopolist sells at different price per unit of output , depending on how much a consumer buys.
        • Charges higher/lower price for fewer units sold and a lower/higher price for larger quantities purchased.
        • Example: Public utilities  electricity charges, water charges or telephone charges.
  • 27.
      • Third-degree price discrimination:
        • The monopolist sells to different group of consumer with different price but every unit of product sold to a given group is sold at same price.
        • The price to be charge based on the price elasticity of demand.
        • Refer slide 11.
        • Example: movie ticket, transportation, medical…
  • 28. THANK YOU