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University of Hawai‘i at Mānoa Department of Economics

University of Hawai‘i at Mānoa Department of Economics. ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #24 Thursday, April 8, 2004. ANNOUNCEMENTS. LAST LECTURE Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 Review Session

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University of Hawai‘i at Mānoa Department of Economics

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  1. University of Hawai‘i at MānoaDepartment of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #24 Thursday, April 8, 2004

  2. ANNOUNCEMENTS • LAST LECTURE • Tuesday, May 4, 2004, 12:00-1:15 PM, BIL 152 • Review Session • Thursday, May 6, 4:30-5:30 PM, BIL 152 • FINAL EXAMINATION • Thursday, May 13, 2004, 12:00-2:00 PM, BIL 152

  3. Lecture #24Monopoly (continued) • Regulated Natural Monopoly • Price Discrimination • 1st Degree (Perfect) • 2nd Degree • 3rd Degree

  4. Natural Monopoly • Economies of Scale • Declining Average Cost • Efficient Production Implies One Firm

  5. Natural Monopoly $/Q D LATC LMC 0 Q MR

  6. Monopoly Pricing P>MR=MC $/Q PM D LATC LMC 0 QM Q MR

  7. Regulated Natural Monopoly Socially Optimal Output Level=Q* P=LMC, “Marginal Cost Pricing” $/Q D LATC P* LMC 0 Q* Q MR

  8. $/Q Regulated Natural Monopoly P=LMC <LATC Firm Suffers Economic Loss Profits<0 D LATC LATC* LMC P* 0 Q* Q MR

  9. Regulated Natural Monopoly P=LATC, “Average Cost Pricing” Firm Breaks Even, Profits=0 $/Q D PAC LATC LMC 0 QAC Q MR

  10. Monopoly Pricing: P>MR=MC $/Q Average Cost Pricing: P=LATC PM Marginal Cost Pricing: P=LMC D PAC LATC LMC P* 0 QAC QM Q* Q MR

  11. Monopoly • Price Discrimination • 1st Degree (Perfect) • 2nd Degree • 3rd Degree

  12. Price Discrimination • Charging different prices to different customers for the same good or service, where the difference is not justified by cost. • Necessary Conditions • Market (Monopoly) Power • Identify and segment different customers and markets • Prevent Arbitrage

  13. MRA $/Q $/Q Q Q DA DB MRB MC 3rd Degree Price Discrimination Market A Market B PB PA QA QB

  14. Competition Gross Social Benefits = E+F; Consumers’ Surplus = E Social Cost = F; Producers’ Surplus = zero. Net Social Benefits = E $/Q Perfect Price Discriminating Monopoly Gross Social Benefits = E+F Social Cost = F; Consumers’ Surplus=zero Net Social Benefits = E; Producers’ Surplus = E. E LRS: LMC=LATC PC F D: MR 0 QC QM Q

  15. 2nd Degree Price Discrimination $/Q P1 P2 P3 LRS: LMC=LATC PC D 0 Q3 QC Q1 Q2 Q MR

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