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Why are we “Speed Reviewing”?

Learn about monopolies and imperfect competition characteristics, pricing strategies, efficiency, and regulation. Understand elasticity, revenue tests, and cost analysis quickly and efficiently. Identify key concepts and study effectively.

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Why are we “Speed Reviewing”?

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  1. Why are we “Speed Reviewing”? • Having you review on your own wouldn’t be effective • Lecturing about every concept would be too boring. “Speed Reviewing” will help you identify what you need to study. So you must come see me about specific things you don’t understand.

  2. Half Way Unit IV: Imperfect Competition

  3. Imperfect Competition • The cost curves are the same • The MR= MC rule still applies • Shut down rule still applies • All have a downward sloping demand curve. • To sell more a firm must lower its price. • 5. All are inefficient. • 6. MR < Demand

  4. Characteristics of Monopolies

  5. 5 Characteristics of a Monopoly 1. Single Seller • The Firm IS the Industry 2. Unique good with no close substitutes 3. “Price Maker” • The firm can change the price by changing the quantity it produces 4. High Barriers to Entry • New firms CANNOT enter market • No immediate competitors 5. Some “Nonprice” Competition

  6. Drawing Monopolies

  7. MR is below Demand P $100 80 60 40 D Q 1 2 3 4 5 6 MR

  8. Why is MR less than Demand?

  9. Why is MR less than Demand? $10

  10. Why is MR less than Demand? $10 $9 $9

  11. Why is MR less than Demand? $10 $9 $9 $8 $8 $8

  12. Why is MR less than Demand? $10 $9 $9 $8 $8 $8 $7 $7 $7 $7

  13. Why is MR less than Demand? $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6

  14. Why is MR less than Demand? $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5

  15. Why is MR less than Demand? $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4

  16. Why is MR less than Demand? $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4

  17. Why is MR less than Demand? $10 $9 $9 MR IS LESS THAN PRICE $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4

  18. Elastic vs. Inelastic Range of Demand Curve

  19. Elastic and Inelastic Range P $100 80 60 40 D Q 1 2 3 4 5 6 MR

  20. Elastic and Inelastic Range $200 150 100 50 Dollars Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 500 250 Dollars Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

  21. Elastic and Inelastic Range Elastic $200 150 100 50 Total Revenue Test If price falls and TR increases then demand is elastic. Dollars MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 500 250 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

  22. Elastic and Inelastic Range Elastic Range Inelastic Range $200 150 100 50 Total Revenue Test If price falls and TR increases then demand is elastic. Dollars MR D Q Total Revenue Test If price falls and TR falls then demand is inelastic. 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 500 250 When MR goes negative, TR will fall Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

  23. Putting Demand, MR, and Cost Together

  24. MR = MC Rule Still Applies 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 How much is the TR, TC and Profit or Loss? $9 8 7 6 5 4 3 2 MC ATC Profit =$5 D MR

  25. 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 How much is the TR, TC, and Profit or Loss? MC ATC 140 Loss AVC D MR Q

  26. Monopolies and Efficiency

  27. Monopolies are inefficient because they… • Charge a higher price • Under produce • Not allocativly efficiency • Produce at higher costs • No productive efficiency • Have little incentive to innovate

  28. An industry in pure competition MB=MC EFFICIENCY OF PERFECT COMPETITION P S = MC CS Pc PS D Q Qc

  29. INEFFICIENCY OF PURE MONOPOLY P S = MC At MR=MC A monopolist will sell less units at a higher price than in competition Pm Pc D MR Q Qm Qc

  30. CS and PS of a Monopoly P Result is DEADWEIGHT LOSS to society S = MC CS Pm Pc PS D MR Q Qm Qc

  31. Are Monopolies Productively Efficient? 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 No. They are not producing at the lowest cost (min ATC) Does Price = Min ATC? MC ATC D MR

  32. Do Monopolies Have Allocative Efficiency? 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 No. Price is greater. The monopoly is under producing. Does Price = MC? MC ATC D MR

  33. Regulating Monopolies

  34. Why Regulate? • Why would the government regulate an monopoly? • To keep prices low • To make monopolies efficient How do they regulate? • Price controls: Price Ceilings

  35. Where should the government place the price ceiling? • 1.Socially Optimal Price • P = MC (Allocative Efficiency) OR • 2. Fair-Return Price(Break–Even) • P = ATC (Normal Profit) • NOT THE SAME AS PRODUCTIVE EFFICIENCY

  36. REGULATED NATURAL MONOPOLY Monopoly Price MR = MC P Pm Price and Costs ATC MC D MR Q Qm

  37. REGULATED NATURAL MONOPOLY P Fair-Return Price Normal Profit Only TR = TC Price and Costs ATC Pf MC D MR Q Qf

  38. REGULATED NATURAL MONOPOLY P Socially-Optimum Price P = MC Price and Costs ATC MC Pr D MR Q Qr

  39. Price Discrimination

  40. PRICE DISCRIMINATION Definition: Practice of selling the same products to different buyers at different prices Requires the following conditions: • Firm must have monopoly power • Firm must be able to segregate the market • Consumers must not be able to resell product

  41. A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MC P ATC Price and Costs MR=D D Q Q1 Q2

  42. What output do they make? Where is Consumer Surplus? MC P ATC Price and Costs MR=D D Q Q2

  43. Where is the Profit? MC Profit with price discrimination P ATC Price and Costs MR=D D Q Q2

  44. Why does MR equal Demand?

  45. Why does MR equal Demand? $10 $10 $9 $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4

  46. What’s the Point? • Perfectly price discriminating firms: • Make more profit • Produce more • Produce at allocative efficiency

  47. Monopoly Practice FRQ

  48. Monopolistic Competition

  49. FOUR MARKET MODELS Pure Monopoly Pure Competition Monopolistic Competition Oligopoly Market Structure Continuum Monopolistic Competition: • Relatively Large Number of Sellers • Differentiated Products • Some control over price • Easy Entry and Exit • Non-price competition (Advertising)

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