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Monoply revised

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  • 1. MONOPOLY
  • 2. Features of Monopoly
    • Single seller of an unique product
    • No close substitutes
    • Price Maker- firm has control over price
    • Barriers to entry
  • 3.
    • Why monopolies arise?
    • Barriers to entry are restrictions on the entry of new firms into an industry
      • Legal restrictions-licenses and patents
      • Economies of scale
      • Control of an essential resource- De-beers owns most of the diamond mines
      • Natural monopolies
  • 4. NATURAL MONOPOLIES
    • A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downward-sloping, long-run average cost curve
    • In these situations, a single firm can sometimes supply market demand at a lower average cost per unit than could two or more firms at smaller rates of output
  • 5.
    • The monopolist can choose either the price or the quantity, but choosing one determines the other
    • Because the monopolist can select the price that maximizes profit, we say the monopolist is a price maker
    • More generally, any firm that has some control over what price to charge is a price maker
  • 6. Competition vs monopoly:
    • Monopoly
    • Is the sole producer
    • Faces a downward sloping demand curve
    • Is a price maker
    • Reduces price to increase sales
    • Competition
    • Many producers
    • Faces a horizontal demand curve
    • Is a price taker
    • Sales cannot affect price
  • 7. Profit maximization for a monopolist:
    • The demand curve for the monopolist is downward sloping
    • The marginal revenue curve is below the demand curve
    • The monopolist maximizes profit by producing the quantity at which marginal revenue equals marginal cost
    • It then finds uses the demand curve to find the price at which the consumers will buy that commodity
  • 8. Profit maximization
    • For competition, P= MR= MC
    • For a monopolist, P>MR =MC
    • A monopolist will make economic profit as long as price is greater than average total cost
    • A monopolist always operates on the elastic portion of the demand curve
  • 9. Profit maximising under monopoly £ Q O MC Q m MR AC AR AC AR
  • 10. Profit maximising under monopoly £ Q O MC Q m MR AC AR AC AR Total profit
  • 11. Equilibrium of industry under perfect competition and monopoly: with the same MC curve £ Q O MC ( = supply under perfect competition) Q 1 MR P 1 Q 2 AR = D Comparison with Perfect competition P 2
  • 12. The Monopolist Minimizes Losses in the Short Run p Marginal cost Average total cost Average variable cost Demand  Average revenue Marginal revenue 0 Q e c b a Loss Quantity per period Dollars per unit A monopolist may not always make profit
  • 13. Short-Run Losses and the Shutdown Decision
    • A monopolist is not assured of profit
      • The demand for the monopolists good or service may not be great enough to generate economic profit in either the short run or the long run
    • In the short run, the loss-minimizing monopolist must decide whether to produce or to shut down
      • If the price covers average variable cost, the firm will produce
      • If not, the firm will shut down, at least in the short run
  • 14. Monopolist’s Supply Curve
    • The intersection of a monopolist’s marginal revenue and marginal cost curve identifies the profit maximizing quantity, but the price is found on the demand curve
    • Thus, there is no curve that shows both price and quantity supplied  there is no monopolist supply curve
  • 15. Dead Weight Loss:
    • Since a monopolist sets its price above the marginal cost, the high price makes monopoly undesirable.
    • The monopolist produces a level of output less than the socially efficient level output
    • The welfare effect of a monopoly is similar to a tax, except that the government gets revenue from the tax whereas the private firm gets the monopoly profit
  • 16. Dead-Weight Loss:
  • 17. Price Discrimination
    • Price Discrimination is the business practice of selling the same good at different prices to different customers even though the cost of producing for the two customers is the same
    • Price discrimination is of three degrees:
    • First degree or perfect price discrimination
    • Second degree or block pricing
    • Third degree price discrimination
  • 18.
    • First-degree : the firm is aware of each buyer’s demand curve
    • Second-degree : the firm charges a different price, depending on the quantity each buyer purchases
    • Third-degree : the firm breaks buyers into groups based upon their price elasticity of demand
    Types of price discrimination
  • 19.
    • Perfect Price Discrimination refers to the situation when the monopolist knows exactly the willingness to pay of each customer and can charge a different price for each unit sold.
    • In reality perfect price discrimination is not possible .
    • Block pricing refers to charging a different price for different ranges of quantity sold.
  • 20. First Degree Price Discrimination (Perfect Price Discrimination)
    • Each consumer is charged the price he/she is willing to pay.
    • Producer takes all the consumer surplus
  • 21. 1st. degree price discrimination Price Quantity Demand PL Q P1 Q1
  • 22. 1st. degree price discrimination Price Quantity Demand PL Q For each consumer price charged=price willing to pay Monopolist appropriates all consumer surplus P1 P2 P3 P4 . .
  • 23. 2nd Degree Price Discrimination (non - linear pricing)
    • Different price is charged for a different quantity bought (but not across consumers).
    • set one price for a 1st bundle, a lower price for a 2nd bundle, ....
    • extract some, but not all of consumer surplus
    • Note:
    • In 3rd deg case=>different prices charged for different consumers
    • In 2nd deg case=>different prices charged for different quantities (for same consumer)
  • 24. Profit-maximising output under third degree price discrimination fig O O O MR X MR Y MR T MC D Y 5 7 1000 2000 3000 (a) Market X (b) Market Y (c) Total (markets X + Y) 9 D X
  • 25. Price and output in Mkt1 & Mkt2 (Maximise Profits)
    • In Market1
    • MR1=MC
    • In Market2
    • MR2=MC
    • that is, MR1=MR2=MC
    • set higher price and sell lower Q in Mkt1 (inelastic D)