Monopoly1

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Monopoly1

  1. 1. Introduction • • Perfect Competition was one type of market structure. It had to satisfy many assumptions - some of which are not all that realistic. Now we will look at another market structure which is nearly he opposite of perfect competition Monopoly - a single firm that produces all the output in a particular market with no close substitutes and high barriers to entry.
  2. 2. Barriers to Entry • • • Barriers to Entry are what keeps monopoly from becoming like a perfectly competitive market Barriers to entry are things that prevent firms from entering the market. Such as... Control of Raw Materials • • Example: The DeBeer’s family owns most of the diamond mines in the world Economies of Scale
  3. 3. Barriers to Entry (Cont.) • Patents and Copyrights  Patents - an exclusive right, granted by the government, to market a product or process for a period of time.  Copyrights - an exclusive right, granted by the government, to publish, copy or sell a piece of music, art or literature. • Other Legal Restrictions  Example:Turk Telekom, etc.
  4. 4. Monopoly in the Short-Run What makes monopoly different from perfect competition is the firm’s demand curve. • Since the firm is the market, the firm’s demand curve is the market demand curve • Hence, it’s downward sloping •
  5. 5. Monopoly in the Short Run • • A profit-maximizing monopolist, then not only chooses how much to produce, but also chooses what price to charge. What prevents a monopolist from charging an amazingly high price?  • there may not be much demand at that price So a monopolist wants to get the highest price that maximizes their profit
  6. 6. Monopoly and Total Revenue • • • • Profits = Total Revenue - Total Cost But Total Revenue is different for a monopolist than in perf. comp. In perf. comp. the moreyou sell, the more the total revenue, but now if you sell more you have to lower your price. Remember when we discussed elasticity, we looked at how total revenue changes as you move down a demand curve
  7. 7. Monopoly and Total Revenue $ Elastic Elasticity = 1 Inelastic Demand Q $ Total Revenue Q
  8. 8. Monopoly Profit • So does a monopolist want to produce at the quantity where elasticity equals 1 and total revenue is at a maximum?  Not necessarily. Remember we need to consider total cost, as well • The monopolist wants to maximize the difference between total revenue and total cost
  9. 9. Total Revenue and Total Cost TC $ TR Q* Q
  10. 10. Monopoly Profit Maximization • Like perfect competition, this is the quantity where the slopes of the TC and TR curves are the same • And also like perfect competition, this is the quantity where MR=MC. • But the MR curve looks different, since the demand curve is downward sloping
  11. 11. D and MR Qd 0 1 2 3 4 5 P ($) 10 8 6 4 2 0
  12. 12. D and MR Qd 0 1 2 3 4 5 P ($) 10 8 6 4 2 0 TR ($) 0 8 12 12 8 0
  13. 13. D and MR Qd 0 1 2 3 4 5 P ($) 10 8 6 4 2 0 TR ($) 0 8 12 12 8 0 MR ($) --8 4 0 -4 -8
  14. 14. D and MR P $10 8 6 4 2 0 D 1 2 3 4 5 Q
  15. 15. D and MR P $10 8 6 4 2 0 MR 1 2 D 3 4 5 Q
  16. 16. Profit Maximizing P MC $10 8 6 4 2 0 MR 1 2 D 3 4 5 Q
  17. 17. Profit Maximizing P MC $10 8 6 4 2 0 MR 1 2 D 3 4 5 Q
  18. 18. Profit Maximizing • • • • So the monopolist chooses the quantity where MC=MR (a quantity of 2, in this example) If they chose less, MR>MC so they could get more money from selling one more than it would cost to make one more. But they also get to choose the price They choose the highest price they can charge in order to sell Q*
  19. 19. Profit Maximizing P MC $10 8 6 4 2 0 MR 1 2 D 3 4 5 Q
  20. 20. Profit Maximizing The price is found by looking to the demand curve and finding the price people are will to pay in order to buy the quantity the firm wants to produce • In the case of this example, this is a price of about $6.50 • How do we show the profit in this case? •
  21. 21. Profit Maximizing P MC $10 ATC AVC 8 6 4 2 0 MR 1 2 D 3 4 5 Q
  22. 22. Profit Maximizing P MC $10 ATC AVC 8 p* 6 atc* 4 2 0 MR 1 2 D 3 4 5 Q
  23. 23. Profit Maximizing P MC $10 ATC AVC 8 p* 6 atc* Profit 4 2 0 MR 1 2 D 3 4 5 Q
  24. 24. Shut Down Rules • • • A monopolist faces the same short run shut down rules as a perfectly competitive firm for all of the same reasons As long as P>AVC, the firm is paying off some fixed cost and should stay open in the short run If P<AVC, the firm should shut down. Just because the firm is a monopolist, does not guarantee a profit.
  25. 25. A Monopolist Who Should Shut Down ATC AVC P MC $10 atc* 8 p* 6 4 2 0 MR 1 2 D 3 4 5 Q
  26. 26. Profit Maximizing • • Q* - where MR = MC (profit maximization) P* - highest P consumers are willing and able to pay for Q* • • Demand curve at Q* In the Short-Run a Monopolist may • • • Make Profits Break Even Operate at a Loss
  27. 27. Profit Maximizing • Note that a Monopolist always Operates on Elastic Portion of Demand Curve • • • Profit Maximizing - MR = MC MC > 0 always MR > 0 when demand is elastic
  28. 28. Benefits of Monopoly • Technological Innovations • Incentive for monopoly profits gives firm an incentive to innovate.
  29. 29. Costs of Monopoly • To begin to understand the costs of monopoly, we need to introduce another concept  Producer • Surplus Producer Surplus - the revenue received by the firm above the marginal cost
  30. 30. Producer Surplus P MC p Q Q
  31. 31. Producer Surplus P MC p The Shaded Area is the Producer Surplus Q Q
  32. 32. Comparison of Monopoly and Perfect Competition • We can compare Monopoly and Perfect Competition by looking at the total amount of social surplus (consumer surplus plus producer surplus) generated by both and then comparing them.
  33. 33. Monopoly vs Perfect Comp. P MC MR P P Monop perf comp D 0 Q Monop Q perf comp Q
  34. 34. Monopoly vs Perfect Comp. P MC MR P P Monop perf comp Total Surplus for Perfect Competition D 0 Q Monop Q perf comp Q
  35. 35. Monopoly vs Perfect Comp. P MC MR P P Monop perf comp Total Surplus for Monopoly D 0 Q Monop Q perf comp Q
  36. 36. Dead Weight Loss If we take the difference between the total social surplus under perfect competition and subtract the total surplus under monopoly we find the dead weight loss • This is the loss in surplus to consumers and producers from having a monopoly •
  37. 37. Monopoly vs Perfect Comp. P MC MR P P The area of this triangle is the dead weight loss Monop perf comp D 0 Q Monop Q perf comp Q
  38. 38. Disadvantages of Monopoly • Inefficient Allocation of Resources • • Allocatively Inefficient (P > MC) Productively Inefficient (P not = min ATC)

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