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Today

Today. Begin Monopoly. Monopoly. Chapter 22. Four Basic Models. Monopolistic Competition = Some firms. Monopoly = One firm. Oligopoly = A few firms. Perfect Competition = Many firms. Profit-Maximizing Monopolist. Suppose only one seller in the market.

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Today

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  1. Today • Begin Monopoly

  2. Monopoly Chapter 22

  3. Four Basic Models Monopolistic Competition = Some firms Monopoly = One firm Oligopoly = A few firms Perfect Competition = Many firms

  4. Profit-Maximizing Monopolist • Suppose only one seller in the market. • For now, assume it sells all its output at the same price (no price discrimination). • Choose Q to maximize: • profits = TR - TFC - TVC. • TFC do not depend on output, so maximize TR - TVC.

  5. Marginal Revenue • Recall: for the price-taking firm, MR = P. • But: the monopolist faces the market demand curve. As he sells more, he moves down the D curve and price falls.

  6. Graph of Marginal Revenue P What is the MR of the 4th unit? How does that compare to price? Will it ever be possible to gain the price as MR? A 10 B Lost 3 9 Gained 9 D 3 4 Q

  7. Monopolist’s Marginal Revenue The monopolist’s marginal revenue (MR) curve lies everywhere below the demand curve. MR < P. P D MR Q

  8. Special Case: Straight-Line Demand The MR curve for a straight-line D curve lies 1/2-way between the D curve and the vertical axis. P D MR Q 10 5

  9. Special Case: Straight-Line Demand Recall: Price elasticity falls as we move down the straight-line D curve. Total revenue rises then falls as we move down the straight-line the D curve. When  = 1, revenue is at its maximum. That’s when MR = 0. P  = 1 D MR Q 10 5

  10. Choosing Quantity • Maximize TR - TVC • TR is area under the MR curve. • TVC is area under the MC curve. • Therefore maximize the difference.

  11. Choosing Quantity Profits are maximized when MR = MC. P TR - TVC MC D MR Q

  12. Monopolist’s Profit-Maximizing Rule Choose Q where MR = MC, charge the highest price possible. Check: In SR, is P  AVC? In LR, is P  ATC? P MC p* D MR Q Q*

  13. Monopolist’s Profit-Maximizing Rule Will this monopolist produce in the LR? In the SR? Can you identify profits or losses? P MC p* ATC D MR Q Q*

  14. Monopolist’s Profits P MC p* ATC D MR Q Q*

  15. The Monopolist & A Supply Curve • A monopolist does not have a supply curve! • He chooses his best price & quantity combination on the market demand curve. • He is not a price taker, so the concept of a supply curve doesn’t make sense. • He is a price maker.

  16. The Monopolist and Efficiency • Productive efficiency: Some have argued that a monopolist may get “lazy” and not keep costs at a minimum. • Others argue that if it’s goal is to maximize profits, that will be incentive enough to minimize costs. • This issue remains unsettled.

  17. The Monopolist and Efficiency • Allocative efficiency: Look at the sum of producers’ and consumers’ surpluses.

  18. Consumers’ Surplus CS: the area under the demand curve but above price. P MC p* D MR Q Q*

  19. Producers’ Surplus PS = TR - TVC PS: the area under price but above MC. P MC p* D MR Q Q*

  20. Sum of Producers’ and Consumers’ Surplus Does the monopolist produce the quantity that is allocatively efficient? P MC p* D MR Q Q*

  21. The Allocatively Efficient Quantity More PS & CS could be gained by producing QE. The marginal benefits of the add’l units are more than their marginal costs. P MC PM D QE Q QM

  22. Efficiency of Monopolist • If the monopolist were to produce & sell the efficient quantity, he would have to set a lower price. • We say the monopolist reduces output and raises price compared to the efficient solution. • This causes a deadweight loss of producer’s & consumers’ surplus.

  23. Deadweight Loss of CS & PS Represents the cost to society of not producing the efficient quantity of this good. P MC PM D QE Q QM

  24. Effects of Monopolies • Produce less than the efficient quantity. • Charge higher prices as a result. • Consumers are hurt on both counts.

  25. Coming Up: • Barriers to entry & the monopolist. • More price discrimination

  26. Group Work • Try to complete the exercise without looking back at your notes. • Identify on the graph for a Monopolist • the profit-maximizing level of output. • the price that the monopolist will charge (assuming he charges a single price for all units). • the total profits or losses of the monopolist

  27. More things to identify • consumer’s surplus • producer’s surplus • the allocatively efficient quantity • the deadweight loss associated with having a monopoly in this market • the supply curve

  28. Monopolist’s situation

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