Monoply revised

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Monoply revised

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

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