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09 monopoly

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09 monopoly

  1. 1. Chapter 9 Monopoly• Key Concepts• Summary• Practice Quiz• Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles:Why doesn’t the monopolist AreHow can price in medallion cabs gouge consumers by New York City discriminationhighest charging the be fair? monopolists? possible price? 2
  3. 3. What is a Monopoly?• Single seller• Unique product• Impossible entry into the market 3
  4. 4. What are the mostcommon Monopolies?Local monopolies are more common real-world approximations of the model than national or world market monopolies 4
  5. 5. What does it mean tohave a Unique Product? There are no close substitutes for the monopolists product 5
  6. 6. What are some examples of Impossible Entry?• Owner of a vital resource• Legal barriers• Economies of scale 6
  7. 7. What is a Natural Monopoly?An industry in which the long-run average cost of production declines throughout the entire market 7
  8. 8. What is unique about a Natural Monopoly?A single firm will produce output at a lower per-unit cost than two or more firms in the industry 8
  9. 9. What is a Price Maker? A firm that faces a downward-sloping demand curve 9
  10. 10. What is the differencebetween Monopoly and Perfect Competition? The D and MR curves of the monopolist are downward sloping; in perfect competition they are horizontal 10
  11. 11. What is unique about the Demand Curve for a Monopolist? The monopolist demand curve and the industry demand curve are one in the same 11
  12. 12. Minimizing Costs in a40 Natural Monopoly Cost per Unit (dollars)353025 5 firms2015 2 firms10 1 firm 5 Quantity of Output 20 40 60 80 100 12
  13. 13. What determines Price for a Monopolist? Demand 13
  14. 14. Why is MR < P for all but the first unit of output?To sell additional units, the price has to be lowered; this price-cut applies to all units, not just the last unit 14
  15. 15. $100 $75 Monopoly Dem Price & Marginal Revenue $50 and $25 Ma 0 rgin $-25 al R $-50 $-75 eve nue$-100 2 4 6 8 10 12 14 16 18 Q 15
  16. 16. $400 Monopoly Total Revenue$300$200$100 2 4 6 8 10 12 14 16 18 Q 16
  17. 17. Where does a Monopolist produce to maximizeprofit or minimize losses? MR = MC 17
  18. 18. P$200 MR=MC$175 MC$150$125$100 ATC $75 Profit $50 AVC $25 MR D 1 2 3 4 5 6 7 8 9 18 Q
  19. 19. P$200 MC ATC$175$150 MR=MC$125 Loss$100 $75 $50 AVC $25 MR D 1 2 3 4 5 6 7 8 9 19 Q
  20. 20. Can a Monopolist make a profit in the long-run? If the positions of a monopolist’s demand and cost curves give it a profit and nothing disturbs these curves, it can make a profit in the long-run 20
  21. 21. What is Price Discrimination?The practice of a seller charging different prices for the same product not justified by cost differences 21
  22. 22. What is Arbitrage?The practice of earning a profit by buying a good at a low price and reselling the good at a higher price 22
  23. 23. Is PriceDiscrimination unfair?Many buyers benefit from the discrimination by not being excluded from purchasing the product 23
  24. 24. Is Monopoly efficient?A monopolist is characterized by inefficiency because resources are underallocated to the production of its product 24
  25. 25. P Price Discrimination Market for average students MR=MCT1 MC MR D Q1 Q 25
  26. 26. P Monopolist Price Discrimination Market for superior students MR=MCT2 MC MR D Q2 Q 26
  27. 27. Is Perfect Competition Efficient?A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources 27
  28. 28. P Perfect Competition MR=MC MC MR, DPc Qc Q 28
  29. 29. P MR=MC Monopolist MCPm MR D Qm Q 29
  30. 30. How does Monopoly harm Consumers?It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation 30
  31. 31. P Impact of Monopolizing and Industry MR=MC ∑MCPmPc MR D Qm Qc Q 31
  32. 32. What is the case against Monopoly?• Higher price• Charges a Price > MC• Long-run economic profit• Alters the distribution of income to favor monopolist 32
  33. 33. Key Concepts 33
  34. 34. Key Concepts• What is a Monopoly?• What is a Natural Monopoly?• What is unique about a Natural Monopoly?• What is a Price Maker?• What is the difference between Monopoly and P• Why is MR < P for all but the first unit of outp 34
  35. 35. Key Concepts cont.• Where does a Monopolist produce to maximize• Can a Monopolist make a profit in the long-ru• What is Price Discrimination?• How does Monopoly harm Consumers? 35
  36. 36. Summary 36
  37. 37. Monopoly is a single sellerfacing the entire industry demandcurve because it is the industry. Themonopolist sells a unique product,and extremely high barriers to entryprotect it from competition. 37
  38. 38. Barriers to entry that preventnew firms from entering an industryare (1) ownership of an essentialresource, (2) legal barriers, and (3)economies of scale. Governmentfranchises, licenses, patents, andcopyrights are the most obvious legalbarriers to entry. 38
  39. 39. A natural monopoly arises becauseof of economies of scale in which theLRAC curve falls as productionincreases. Without governmentrestrictions, economies of scale allow asingle firm to produce at a lower costthan any firm producing a smalleroutput. Thus, smaller firms leave theindustry, new firms fear competingwith the monopolist, and the result isthat a monopoly emerges naturally. 39
  40. 40. Minimizing Costs in a40 Natural Monopoly Cost per Unit (dollars)353025 5 firms2015 2 firms10 1 firm 5 Quantity of Output 20 40 60 80 100 40
  41. 41. A price-maker firm faces adownward-sloping demand curve. Ittherefore searches its demand curveto find the price-output combinationthat maximizes its profit andminimizes its loss. 41
  42. 42. The marginal revenue and thedemand curves are downward-sloping for a monopolist. Themarginal revenue curve for amonopolist is below the demandcurve, the total revenue curvereaches its maximum wheremarginal revenue equals zero. 42
  43. 43. Price elasticity of demandcorresponds to sections of themarginal revenue curve. When MRis positive, price elasticity ofdemand is elastic, Ed > 1. When MRis equal to zero, price elasticity ofdemand is unit elastic, = 1. WhenMR is negative, price elasticity ofdemand is inelastic, Ed < 1. 43
  44. 44. The short-run-profit-maximizingmonopolist, like the perfectlycompetitive firm, locates the profit-maximizing price by producing theoutput where the MR and the MACcurves intersect. If this is less than theAVC curve, the monopolist shutsdown to minimize losses. 44
  45. 45. P$200 MR=MC$175 MC$150$125$100 ATC $75 Profit $50 AVC $25 MR D 1 2 3 4 5 6 7 8 9 45 Q
  46. 46. P$200 MC ATC$175$150 MR=MC$125 Loss$100 $75 $50 AVC $25 MR D 1 2 3 4 5 6 7 8 9 46 Q
  47. 47. The long-run-profit-maximizingmonopolist earns a profit because ofbarriers to entry. If demand and costconditions prevent the monopolist fromearning a profit, it will leave theindustry. 47
  48. 48. Price discrimination allows themonopolist to increase profits bycharging buyers different prices,rather than a single price. 48
  49. 49. Three conditions are necessaryfor price discrimination: (1) thedemand curve must be downward-sloping, (2) buyers in differentmarkets must have different priceelasticities of demand, and (3) buyersmust be prevented from reselling theproduct at a higher price than thepurchase price. 49
  50. 50. P Price Discrimination Market for average students MR=MCT1 MC MR D Q1 Q 50
  51. 51. P Monopolist Price Discrimination Market for superior students MR=MCT2 MC MR D Q2 Q 51
  52. 52. Monopoly disadvantages are these:(1) A monopolist charges a higherprice and produces less output than aperfectly competitive firm, (2) resourceallocation is inefficient because themonopolist produces less than ifcompetition existed, (3) monopolyproduces higher long-run profits than ifcompetition existed, and (4) monopolytransfers income from consumers toproducers to a greater degree thanunder perfect competition. 52
  53. 53. P Perfect Competition MR=MC MC MR, DPc Qc Q 53
  54. 54. P MR=MC Monopolist MCPm MR D Qm Q 54
  55. 55. Chapter 9 Quiz ©2000 South-Western College Publishing 55
  56. 56. 1. A monopolist always faces a demand curve that is a. perfectly inelastic. b. perfectly elastic. c. unit elastic. d. the same as the market demand curve.D. A monopoly is the only seller, so there is no distinction between the market demand curve and the individual demand curve. 56
  57. 57. 2. A monopoly sets the a. price at which marginal revenue equals zero. b. price that maximizes total revenue. c. highest possible price on its demand curve. d. price at which marginal revenue equals marginal cost. D. Profits are always maximized if the firm produces at the point where MR = MC. 57
  58. 58. P$80 MR=MC$70 MC$60$50$40 ATC$30 Profit$20 AVC$10 MR D 1 2 3 4 5 6 7 8 9 58 Q
  59. 59. 3. A monopolist sets a. the highest possible price. b. a price corresponding to the minimum average total cost. c. a price equal to marginal revenue. d. a price determined by the point on the demand curve corresponding to the level of output at which marginal revenue equals marginal cost. e. none of the above. D. Demand determines price in all market forms. 59
  60. 60. 4. Which of the following is true for the monopolist? a. Economic profit is possible in the long- run. b. Marginal Revenue is less than the price charged. c. Profit maximizing or loss minimizing occurs when marginal revenue equals marginal cost. D.d.All of the above are characteristics of All of the above are true. a monopoly. 60
  61. 61. P$40 Exhibit 8 MC $30 $20 ATC AVC $10 D 100 MR 200 300 400 Q 61
  62. 62. 5. As shown in Exhibit 8, the profit- maximizing or loss-minimizing output for this monopolist is a. 100 units a day. b. 200 units a day. c. 300 units a day. d. 400 units a day.B. 200 units is the point at which MR = MC. 62
  63. 63. 6. As shown in Exhibit 8, this monopolist a. should shut down in the short-run. b. should shut down in the long-run. c. earns zero economic profit. d. earns positive economic profit.D. At the point where MR = MC (on the vertical line), P is greater than ATC; therefore, total revenue is greater than total cost and an economic profit is being made. 63
  64. 64. 7. To maximize profit or minimize loss, the monopolist in Exhibit 8 should set its price at a. $30 per unit. b. $25 per unit. c. $20 per unit.. d. $10 per unit. e. $40 per unit. B. Maximum profit or minimized losses are found by drawing a vertical line where MR = MC. This line intersects the demand curve at $25. 64
  65. 65. 8. If the monopolist in Exhibit 8 operates at the profit-maximizing output, it will earn total revenue to pay about what portion of its total fixed cost? a. None. b. One-half. c. Two-thirds. d. All total fixed costs.D. Since the monopolist is making a profit, it can pay all of its fixed costs. 65
  66. 66. 9. For a monopolist to practice effective price discrimination, one necessary condition is a. identical demand curves among groups of buyers. b. differences in the price elasticity of demand among groups of buyers. c. a homogeneous product. d. none of the above. B. Price discrimination takes place when a monopolist is faced with buyers that are widely different; therefore, the buyers elasticity of demand for the product will be different. 66
  67. 67. 10. What is the act of buying a commodity at a lower price and selling it at a higher price? a. Buying short. b. Discounting. c. Tariffing. d. Arbitrage. D. The practice of earning a profit by buying a good at a low price and reselling the good at a higher price 67
  68. 68. 11. Under both perfect competition and monopoly, a firm a. is a price taker. b. is a price maker. c. will shut down in the short run if price falls short of average total cost. d. always earns a pure economic profit. e. sets marginal cost equal to marginal revenue. E. The profit maximizing output for any firm is where MR = MC. 68
  69. 69. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 69
  70. 70. END 70

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