the document is on Cost volume profit analysis.
(Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income.)
the document is on Cost volume profit analysis.
(Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income.)
Students should be able to:
Understand the assumptions of perfect competition and be able to explain the behaviour of firms in this market structure.
Understand the significance of firms as price-takers in perfectly competitive markets. An understanding of the meaning of shut-down point is required. The impact of entry into and exit from the industry should be considered.
Imperfect competition is an economic concept used to describe marketplace conditions that render a market less than perfectly competitive, creating market inefficiencies that result in losses of economic value.
In the real world, markets are nearly always in a condition of imperfect competition to some extent. However, the term is typically only used to describe markets where the level of competition among sellers is substantially below ideal conditions.A situation of imperfect competition exists whenever one of the fundamental characteristics of perfect competition is missing. When there is perfect competition in a market, prices are controlled primarily by the ordinary economic factors of supply and demand.
Notably, the stock market may be viewed as a continually imperfect market because not all investors have ready access to the same level of information regarding potential investments.
Imperfect competition commonly exists when a market structure is in the form of monopolies, duopolies, oligopolies, or monopsony (very rare)
Market structures that effectively render competition imperfect are most often characterized by a lack of competitive suppliers. Imperfect competition often exists as a result of extremely high barriers to entry for new suppliers. For example, the airline industry has high barriers to entry due to the extremely high cost of aircraft.
The most extreme condition of imperfect competition exists when the market for a particular good or service is a monopoly, one in which there is a sole supplier. A supplier that has a monopoly on the provision of a good or service essentially has complete control over prices.
Because it has no competition from other suppliers, the sole supplier can essentially set the price of its goods or services at any level it desires. Monopolies often charge prices that provide them with significantly higher profit margins than most companies operate with.
A duopoly is a market structure in which there are only two suppliers. Although duopolies are somewhat more competitive than monopolies, the level of competition is still far from perfect, as the two suppliers still have significant control of marketplace prices.
An example of a duopoly exists in the United Kingdom’s detergent market, where Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) are virtually the only suppliers. The two suppliers in a duopoly often collude in price setting.
Oligopolies are much more common than either monopolies or duopolies. In an oligopoly, there are several – but a small, limited number – of suppliers. The market for cell phone service in the United States is an example of an oligopoly, as it is essentially controlled by just a handful of suppliers. The small number of suppliers, which limits buying choices for consumers, provides the suppliers with substantial, although not complete, control over pricing.
A rare form of imperfect competition is monopsony. A monopsony is a single buyer, rather than any supplier.
A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
Imperfect competition covers all situations where there is neither pure competition nor pure monopoly.
Perfect competition and pure monopoly are very unlikely to be found in the real world.
In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition.
Monopoly refers to the market situation where there is a
Single seller selling a product which has no close substitutes.
Monopolies are characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the existence of a high monopoly price well above the firm's marginal cost that leads to a high monopoly profit
The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few” ,few firms or few sellers.
DEFINATION:
Oligopoly is that form of market where there are few firms and there is natural interdependence among the firms regarding price and output policy.
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Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
2. 2
Monopoly
• A monopoly is a single supplier to a
market
• This firm may choose to produce at any
point on the market demand curve
3. 3
Barriers to Entry
• The reason a monopoly exists is that
other firms find it unprofitable or
impossible to enter the market
• Barriers to entry are the source of all
monopoly power
– there are two general types of barriers to
entry
• technical barriers
• legal barriers
4. 4
Technical Barriers to Entry
• The production of a good may exhibit
decreasing marginal and average costs
over a wide range of output levels
– in this situation, relatively large-scale firms
are low-cost producers
• firms may find it profitable to drive others out of
the industry by cutting prices
• this situation is known as natural monopoly
• once the monopoly is established, entry of new
firms will be difficult
5. 5
Technical Barriers to Entry
• Another technical basis of monopoly is
special knowledge of a low-cost
productive technique
– it may be difficult to keep this knowledge
out of the hands of other firms
• Ownership of unique resources may
also be a lasting basis for maintaining a
monopoly
6. 6
Legal Barriers to Entry
• Many pure monopolies are created as a
matter of law
– with a patent, the basic technology for a
product is assigned to one firm
– the government may also award a firm an
exclusive franchise to serve a market
7. 7
Creation of Barriers to Entry
• Some barriers to entry result from actions
taken by the firm
– research and development of new products
or technologies
– purchase of unique resources
– lobbying efforts to gain monopoly power
• The attempt by a monopolist to erect
barriers to entry may involve real
resource costs
8. 8
Profit Maximization
• To maximize profits, a monopolist will
choose to produce that output level for
which marginal revenue is equal to
marginal cost
– marginal revenue is less than price because
the monopolist faces a downward-sloping
demand curve
• he must lower its price on all units to be sold if it
is to generate the extra demand for this unit
9. 9
Profit Maximization
• Since MR = MC at the profit-maximizing
output and P > MR for a monopolist, the
monopolist will set a price greater than
marginal cost
10. 10
C
Profits can be found in
the shaded rectangle
Profit Maximization
AC
MC
D
MR
Quantity
Price
Q*
The monopolist will maximize
profits where MR = MC
P* The firm will charge a price
of P*
11. 11
The Inverse Elasticity Rule
• The gap between a firm’s price and its
marginal cost is inversely related to the
price elasticity of demand facing the firm
PQeP
MCP
,
1
where eQ,P is the elasticity of demand
for the entire market
12. 12
The Inverse Elasticity Rule
• Two general conclusions about monopoly
pricing can be drawn:
– a monopoly will choose to operate only in
regions where the market demand curve is
elastic
• eQ,P < -1
– the firm’s “markup” over marginal cost
depends inversely on the elasticity of market
demand
13. 13
Monopoly Profits
• Monopoly profits will be positive as long
as P > AC
• Monopoly profits can continue into the
long run because entry is not possible
– some economists refer to the profits that a
monopoly earns in the long run as
monopoly rents
• the return to the factor that forms the basis of
the monopoly
14. 14
Monopoly Profits
• The size of monopoly profits in the long
run will depend on the relationship
between average costs and market
demand for the product
16. 16
No Monopoly Supply Curve
• With a fixed market demand curve, the
supply “curve” for a monopolist will only
be one point
– the price-output combination where MR =
MC
• If the demand curve shifts, the marginal
revenue curve shifts and a new profit-
maximizing output will be chosen
17. 17
Monopoly with Linear Demand
• Suppose that the market for frisbees
has a linear demand curve of the form
Q = 2,000 - 20P
or
P = 100 - Q/20
• The total costs of the frisbee producer
are given by
C(Q) = 0.05Q2 + 10,000
18. 18
Monopoly with Linear Demand
• To maximize profits, the monopolist
chooses the output for which MR = MC
• We need to find total revenue
TR = PQ = 100Q - Q2/20
• Therefore, marginal revenue is
MR = 100 - Q/10
while marginal cost is
MC = 0.01Q
19. 19
Monopoly with Linear Demand
• Thus, MR = MC where
100 - Q/10 = 0.01Q
Q* = 500 P* = 75
• At the profit-maximizing output,
C(Q) = 0.05(500)2 + 10,000 = 22,500
AC = 22,500/500 = 45
= (P* - AC)Q = (75 - 45)500 = 15,000
20. 20
Monopoly with Linear Demand
• To see that the inverse elasticity rule
holds, we can calculate the elasticity of
demand at the monopoly’s profit-
maximizing level of output
3
500
75
20,
Q
P
P
Q
e PQ
21. 21
Monopoly with Linear Demand
• The inverse elasticity rule specifies that
3
11
,
PQeP
MCP
• Since P* = 75 and MC = 50, this
relationship holds
22. 22
Monopoly and Resource
Allocation
• To evaluate the allocational effect of a
monopoly, we will use a perfectly
competitive, constant-cost industry as a
basis of comparison
– the industry’s long-run supply curve is
infinitely elastic with a price equal to both
marginal and average cost
24. 24
Consumer surplus would fall
Producer surplus will rise
There is a deadweight
loss from monopoly
Monopoly and Resource
Allocation
Quantity
Price
MC=AC
D
MR
Q*Q**
P*
P** Consumer surplus falls by more
than producer surplus rises.
25. 25
Welfare Losses and Elasticity
• Assume that the constant marginal (and
average) costs for a monopolist are
given by c and that the compensated
demand curve has a constant elasticity:
Q = Pe
where e is the price elasticity of demand
(e < -1)
26. 26
Welfare Losses and Elasticity
• The competitive price in this market will
be
Pc = c
and the monopoly price is given by
e
c
Pm
1
1
27. 27
Welfare Losses and Elasticity
• The consumer surplus associated with
any price (P0) can be computed as
00
)(
P
e
P
dPPdPPQCS
11
1
0
1
0
e
P
e
P
CS
e
P
e
28. 28
Welfare Losses and Elasticity
• Therefore, under perfect competition
1
1
e
c
CS
e
c
1
1
1
1
e
e
c
CS
e
m
and under monopoly
29. 29
Welfare Losses and Elasticity
• Taking the ratio of these two surplus
measures yields
1
1
1
1
e
c
m
e
CS
CS
• If e = -2, this ratio is ½
– consumer surplus under monopoly is half
what it is under perfect competition
30. 30
Welfare Losses and Elasticity
• Monopoly profits are given by
mmmmm Qc
e
c
cQQP
1
1
e
e
c
e
c
e
e
c
ee
m
1
1
1
1
1
1
1
1
31. 31
Welfare Losses and Elasticity
• To find the transfer from consumer surplus
into monopoly profits we can divide
monopoly profits by the competitive
consumer surplus
e
e
c
m
e
e
e
e
e
CS
11
1
11
1
• If e = -2, this ratio is ¼
32. 32
Monopoly and Product Quality
• The market power enjoyed by a monopoly
may be exercised along dimensions other
than the market price of its product
– type, quality, or diversity of goods
• Whether a monopoly will produce a
higher-quality or lower-quality good than
would be produced under competition
depends on demand and the firm’s costs
33. 33
Monopoly and Product Quality
• Suppose that consumers’ willingness to
pay for quality (X) is given by the inverse
demand function P(Q,X) where
P/Q < 0 and P/X > 0
• If costs are given by C(Q,X), the
monopoly will choose Q and X to
maximize
= P(Q,X)Q - C(Q,X)
34. 34
Monopoly and Product Quality
• First-order conditions for a maximum are
0),(
QC
Q
P
QXQP
Q
0
XC
X
P
Q
X
– MR = MC for output decisions
– Marginal revenue from increasing quality by
one unit is equal to the marginal cost of
making such an increase
35. 35
Monopoly and Product Quality
• The level of product quality that will be
opted for under competitive conditions is
the one that maximizes net social welfare
*
0
),(),(
Q
XQCdQXQPSW
• Maximizing with respect to X yields
*
0
0),(
Q
XX CdQXQP
X
SW
36. 36
Monopoly and Product Quality
• The difference between the quality choice
of a competitive industry and the
monopolist is:
– the monopolist looks at the marginal
valuation of one more unit of quality
assuming that Q is at its profit-maximizing
level
– the competitve industry looks at the marginal
value of quality averaged across all output
levels
37. 37
Monopoly and Product Quality
• Even if a monopoly and a perfectly
competitive industry chose the same
output level, they might opt for diffferent
quality levels
– each is concerned with a different margin
in its decision making
38. 38
Price Discrimination
• A monopoly engages in price
discrimination if it is able to sell otherwise
identical units of output at different prices
• Whether a price discrimination strategy is
feasible depends on the inability of
buyers to practice arbitrage
– profit-seeking middlemen will destroy any
discriminatory pricing scheme if possible
• price discrimination becomes possible if resale is
costly
39. 39
Perfect Price Discrimination
• If each buyer can be separately
identified by the monopolist, it may be
possible to charge each buyer the
maximum price he would be willing to
pay for the good
– perfect or first-degree price discrimination
• extracts all consumer surplus
• no deadweight loss
40. 40
The monopolist will
continue this way until the
marginal buyer is no
longer willing to pay the
good’s marginal cost
Q1
P1
The first buyer pays P1 for Q1 units
Q2
P2 The second buyer pays P2 for Q2-Q1 units
Perfect Price Discrimination
Quantity
Price
D
Under perfect price discrimination, the monopolist
charges a different price to each buyer
MC
41. 41
Perfect Price Discrimination
• Recall the example of the frisbee
manufacturer
• If this monopolist wishes to practice
perfect price discrimination, he will want
to produce the quantity for which the
marginal buyer pays a price exactly
equal to the marginal cost
42. 42
Perfect Price Discrimination
• Therefore,
P = 100 - Q/20 = MC = 0.1Q
Q* = 666
• Total revenue and total costs will be
511,55
40
100)(
666
0
*
0
2
Q Q
QdQQPR
178,32000,1005.0)( 2
QQc
• Profit is much larger (23,333 > 15,000)
43. 43
Market Separation
• Perfect price discrimination requires the
monopolist to know the demand function
for each potential buyer
• A less stringent requirement would be to
assume that the monopoly can separate its
buyers into a few identifiable markets
– can follow a different pricing policy in each
market
– third-degree price discrimination
44. 44
Market Separation
• All the monopolist needs to know in this
case is the price elasticities of demand
for each market
– set price according to the inverse elasticity
rule
• If the marginal cost is the same in all
markets,
)
1
1()
1
1(
j
j
i
i
e
P
e
P
45. 45
Market Separation
• This implies that
)
1
1(
)
1
1(
i
j
j
i
e
e
P
P
• The profit-maximizing price will be
higher in markets where demand is less
elastic
46. 46
Market Separation
Quantity in Market 2Quantity in Market 1
Price
0
DD
MRMR
MCMC
Q2*
P2
Q1*
P1
If two markets are separate, maximum profits occur by
setting different prices in the two markets
The market with the less
elastic demand will be
charged the higher price
47. 47
Third-Degree Price
Discrimination
• Suppose that the demand curves in two
separated markets are given by
Q1 = 24 – P1
Q2 = 24 – 2P2
• Suppose that MC = 6
• Profit maximization requires that
MR1 = 24 – 2Q1 = 6 = MR2 = 12 – Q2
49. 49
Third-Degree Price
Discrimination
• The allocational impact of this policy can be
evaluated by calculating the deadweight
losses in the two markets
– the competitive output would be 18 in market 1
and 12 in market 2
DW1 = 0.5(P1-MC)(18-Q1) = 0.5(15-6)(18-9) = 40.5
DW2 = 0.5(P2-MC)(12-Q2) = 0.5(9-6)(12-6) = 9
50. 50
Third-Degree Price
Discrimination
• If this monopoly was to pursue a single-
price policy, it would use the demand
function
Q = Q1 + Q2 = 48 – 3P
• So marginal revenue would be
MR = 16 – 2Q/3
• Profit-maximization occurs where
Q = 15 P = 11
52. 52
Two-Part Tariffs
• A linear two-part tariff occurs when
buyers must pay a fixed fee for the right
to consume a good and a uniform price
for each unit consumed
T(q) = a + pq
• The monopolist’s goal is to choose a
and p to maximize profits, given the
demand for the product
53. 53
Two-Part Tariffs
• Because the average price paid by any
demander is
p’ = T/q = a/q + p
this tariff is only feasible if those who
pay low average prices (those for whom
q is large) cannot resell the good to
those who must pay high average
prices (those for whom q is small)
54. 54
Two-Part Tariffs
• One feasible approach for profit
maximization would be for the firm to set
p = MC and then set a equal to the
consumer surplus of the least eager
buyer
– this might not be the most profitable
approach
– in general, optimal pricing schedules will
depend on a variety of contingencies
55. 55
Two-Part Tariffs
• Suppose there are two different buyers
with the demand functions
q1 = 24 - p1
q2 = 24 - 2p2
• If MC = 6, one way for the monopolist to
implement a two-part tariff would be to
set p1 = p2 = MC = 6
q1 = 18 q2 = 12
56. 56
Two-Part Tariffs
• With this marginal price, demander 2
obtains consumer surplus of 36
– this would be the maximum entry fee that
can be charged without causing this buyer
to leave the market
• This means that the two-part tariff in this
case would be
T(q) = 36 + 6q
57. 57
Regulation of Monopoly
• Natural monopolies such as the utility,
communications, and transportation
industries are highly regulated in many
countries
58. 58
Regulation of Monopoly
• Many economists believe that it is
important for the prices of regulated
monopolies to reflect marginal costs of
production accurately
• An enforced policy of marginal cost
pricing will cause a natural monopoly to
operate at a loss
– natural monopolies exhibit declining
average costs over a wide range of output
59. 59
Regulation of Monopoly
Quantity
Price
D
MR
AC
MC
Because natural monopolies exhibit
decreasing costs, MC falls below AC
C1
P1
Q1
An unregulated monopoly will
maximize profit at Q1 and P1
C2
P2
Q2
If regulators force the
monopoly to charge a
price of P2, the firm will
suffer a loss because
P2 < C2
60. 60
cover the losses on the sales to
low-price customers
The profits on the sales to high-
price customers are enough to
Regulation of Monopoly
Quantity
Price
D
AC
MC
Suppose that the regulatory commission allows the
monopoly to charge a price of P1 to some users
P1
Q1
C1
Other users are offered the lower price
of P2
P2
Q2
C2
61. 61
Regulation of Monopoly
• Another approach followed in many
regulatory situations is to allow the
monopoly to charge a price above
marginal cost that is sufficient to earn a
“fair” rate of return on investment
– if this rate of return is greater than that
which would occur in a competitive market,
there is an incentive to use relatively more
capital than would truly minimize costs
62. 62
Regulation of Monopoly
• Suppose that a regulated utility has a
production function of the form
q = f (k,l)
• The firm’s actual rate of return on
capital is defined as
k
wkpf
s
ll
),(
63. 63
Regulation of Monopoly
• Suppose that s is constrained by
regulation to be equal to s0, then the
firm’s problem is to maximize profits
= pf (k,l) – wl – vk
subject to this constraint
• The Lagrangian for this problem is
L = pf (k,l) – wl – vk + [wl + s0k – pf (k,l)]
64. 64
Regulation of Monopoly
• If =0, regulation is ineffective and the
monopoly behaves like any profit-
maximizing firm
• If =1, the Lagrangian reduces to
L = (s0 – v)k
which (assuming s0>v), will mean that
the monopoly will hire infinite amounts
of capital – an implausible result
65. 65
Regulation of Monopoly
• Therefore, 0<<1 and the first-order
conditions for a maximum are:
0)(
ll
l
pfwwpf
L
0)( 0
kk pfsvpf
k
L
0),(0
ll kpfsw
L
66. 66
Regulation of Monopoly
• Because s0>v and <1, this means that
pfk < v
• The firm will hire more capital than it
would under unregulated conditions
– it will also achieve a lower marginal
productivity of capital
67. 67
Dynamic Views of Monopoly
• Some economists have stressed the
beneficial role that monopoly profits can
play in the process of economic
development
– these profits provide funds that can be
invested in research and development
– the possibility of attaining or maintaining a
monopoly position provides an incentive to
keep one step ahead of potential competitors
68. 68
Important Points to Note:
• The most profitable level of output for
the monopolist is the one for which
marginal revenue is equal to marginal
cost
– at this output level, price will exceed
marginal cost
– the profitability of the monopolist will
depend on the relationship between price
and average cost
69. 69
Important Points to Note:
• Relative to perfect competition,
monopoly involves a loss of consumer
surplus for demanders
– some of this is transferred into monopoly
profits, whereas some of the loss in
consumer surplus represents a
deadweight loss of overall economic
welfare
– it is a sign of Pareto inefficiency
70. 70
Important Points to Note:
• Monopolies may opt for different levels
of quality than would perfectly
competitive firms
• Durable good monopolists may be
constrained by markets for used goods
71. 71
Important Points to Note:
• A monopoly may be able to increase its
profits further through price
discrimination – charging different
prices to different categories of buyers
– the ability of the monopoly to practice
price discrimination depends on its ability
to prevent arbitrage among buyers
72. 72
Important Points to Note:
• Governments often choose to regulate
natural monopolies (firms with
diminishing average costs over a broad
range of output levels)
– the type of regulatory mechanisms
adopted can affect the behavior of the
regulated firm