Monopoly

1. Monopoly Chapter 12

2. Laugher Curve The First Law of Economics: For every economist, there exists an equal and opposite economist. The Second Law of Economics: They're both wrong.

3. Introduction Monopoly is a market structure in which a single firm makes up the entire market. Monopolies exist because of barriers to entry into a market that prevent competition.

4. Introduction Legal barriers, such as patents, prevent others from entering the market.

5. Introduction Natural barriers – the firm has a unique ability to produce what other firms can’t duplicate.

6. The Key Difference Between a Monopolist and a Perfect Competitor For a competitive firm, marginal revenue equals price. For a monopolist it does not. The monopolist takes into account the fact that its production decision can affect price.

7. The Key Difference Between a Monopolist and a Perfect Competitor A competitive firm is too small to affect the price.

8. The Key Difference Between a Monopolist and a Perfect Competitor A competitive firm's marginal revenue is the market price.

9. A Model of Monopoly How much should the monopolistic firm choose to produce if it wants to maximize profit?

10. The Monopolist’s Price and Output Numerically The first thing to remember is that marginal revenue is the change in total revenue that occurs as a firm changes its output.

11. The Monopolist’s Price and Output Numerically When a monopolist increases output, it lowers the price on all previous units.

12. The Monopolist’s Price and Output Numerically In order to maximize profit, a monopolist produces the output level at which marginal cost equals marginal revenue.

13. Profit Maximization for a Monopolist

14. The Monopolist’s Price and Output Graphically The marginal revenue curve is a graphical measure of the change in revenue that occurs in response to a change in price. It tells us the additional revenue the firm will get by expanding output.

15. MR = MC Determines the Profit-Maximizing Output If MR > MC, the monopolist gains profit by increasing output. If MR < MC, the monopolist gains profit by decreasing output. If MC = MR, the monopolist is maximizing profit.

16. The Price a Monopolist Will Charge The MR = MC condition determines the quantity a monopolist produces. The monopolist will charge the maximum price consumers are willing to pay for that quantity. That price is found on the demand curve.

17. The Price a Monopolist Will Charge To determine the profit-maximizing price (where MC = MR), first find the profit maximizing output.

18. Determining the Monopolist’s Price and Output

19. Comparing Monopoly and Perfect Competition Equilibrium output for both the monopolist and the competitor is determined by the MC = MR condition.

20. Comparing Monopoly and Perfect Competition Because the monopolist’s marginal revenue is below its price, price and quantity will not be the same.

21. Comparing Monopoly and Perfect Competition

22. Profits and Monopoly Draw the firm's marginal revenue curve. Determine the output the monopolist will produce by the intersection of the MC and MR curves.

23. Profits and Monopoly Determine the price the monopolist will charge for that output.

24. Profits and Monopoly Determine the monopolist's profit (loss) by subtracting average total cost from average revenue (P) at that level of output and multiply by the chosen output.

25. Profits and Monopoly The monopolist will make a profit if price exceeds average total cost.

26. A Monopolist Making a Profit A monopolist can make a profit.

27. A Monopolist Making a Profit

28. A Monopolist Breaking Even A monopolist can break even.

29. A Monopolist Breaking Even

30. A Monopolist Making a Loss A monopolist can make a loss.

31. A Monopolist Making a Loss

32. The Welfare Loss from Monopoly People’s purchase decisions don’t reflect the true cost to society because monopolies charge a price higher than marginal cost.

33. The Welfare Loss from Monopoly The marginal cost of increasing output is lower than the marginal benefit of increasing output.

34. The Welfare Loss from Monopoly The welfare loss of a monopolist is represented by the triangles B and D.

35. The Welfare Loss from Monopoly

36. The Price-Discriminating Monopolist Price discrimination is the ability to charge different prices to different individuals or groups of individuals.

37. The Price-Discriminating Monopolist In order to price discriminate, a monopolist must be able to:

38. The Price-Discriminating Monopolist A price-discriminating monopolist can increase both output and profit.

39. Price Discrimination Occurs in the Real World Movie theaters give senior citizens and child discounts. All airline Super Saver fares include Saturday night stopovers. Automobiles are seldom sold at their sticker price. Theaters have midweek special rates.

40. Price Discrimination Occurs in the Real World Retail tire stores run special sales about half the time.

41. Barriers to Entry and Monopoly Monopolies exist because of some barrier to entry. Barrier to entry – a social, political, or economic impediment that prevents firms from entering the market.

42. Barriers to Entry and Monopoly If there were no barriers to entry, profit-maximizing firms would always compete away monopoly profits.

43. Barriers to Entry and Monopoly Three important barriers to entry are natural ability, increasing returns to scale, and government restrictions.

44. Natural Ability One firm may be more efficient than other firms because it is better at producing a good than those other firms making it.

45. Natural Ability The public views “just monopolies” as those which accrue to the firm because of the firm’s ability.

46. Economies of Scale If significant economies of scale are possible, it is inefficient to have two producers. If each produced half of the output, neither could take advantage of economies of scale.

47. Economies of Scale A natural monopoly is an industry in which one firm can produce at a lower cost than can two or more firms.

48. Economies of Scale A natural monopoly will occur when indivisible set up costs are so large that average total costs fall within the range of potential output.

49. Economies of Scale There is no welfare loss in the natural monopoly situation.

50. A Natural Monopolist

51. A Natural Monopolist

52. Government Restrictions Monopolies can be created by government.

53. Normative Views of Monopoly The public generally views monopolies the way the Classical economists did – they consider them unfair and wrong.

54. Normative Views of Monopoly The public accepts patents which are a type of government-created monopoly.

55. Normative Views of Monopoly The public does not like the distributional effects of monopoly.

56. Normative Views of Monopoly It is possible for the well-financed and the well-connected to garner government favors.

57. Government Policy and Monopoly: AIDS Drugs The patents for AIDS drugs are owned by a small group of pharmaceutical companies. They can charge a very high price for a drug that costs little to produce.

58. Government Policy and Monopoly: AIDS Drugs What, should the government do?

59. Government Policy and Monopoly: AIDS Drugs The government could buy the patents.

60. Monopoly End of Chapter 12