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Unit 4: Imperfect Competition

Unit 4: Imperfect Competition. REVIEW. Name That Concept Rules: Cannot use the word(s) Focus on the concept not word Ex: Price Maker. Name That Concept. Monopoly Imperfect Competition Barriers to Entry Dead Weight Loss Productive Efficiency. Name That Concept.

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Unit 4: Imperfect Competition

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  1. Unit 4: Imperfect Competition

  2. REVIEW Name That Concept Rules: • Cannot use the word(s) • Focus on the concept not word Ex: Price Maker

  3. Name That Concept • Monopoly • Imperfect Competition • Barriers to Entry • Dead Weight Loss • Productive Efficiency

  4. Name That Concept • Marginal Revenue • MR = MC • Shut down rule • Natural Monopoly • Allocative Efficiency

  5. Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve. How much is the TR, TC and Profit or Loss? P $10 9 8 7 6 5 MC ATC Profit =$20 D MR Q 16 17 18 19 20 5

  6. Elastic and Inelastic Range P Elastic Inelastic $15 10 5 Total Revenue Test If price falls and TR increases then demand is elastic. D Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR A monopoly will only produce in the elastic range MR $64 40 20 Total Revenue Test If price falls and TR falls then demand is inelastic. TR Q 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

  7. Are Monopolies Efficient?

  8. Monopolies are inefficient because they… • Charge a higher price • Don’t produce enough • Not allocatively efficiency • Produce at higher costs • Not productively efficiency • Have little incentive to innovate Why? Because there is little external pressure to be efficient 8

  9. Monopolies vs. Perfect Competition Where is CS and PS for a monopoly? S = MC P CS Total surplus falls. Now there is DEADWEIGHT LOSS Pm PS D MR Q Qm 9

  10. Regulating Monopolies

  11. Why Regulate? Why would the government regulate a monopoly? • To keep prices low • To make monopolies efficient How do they regulate? • Use Price controls: Price Ceilings • Why don’t taxes work? • Taxes limit supply and that’s the problem

  12. 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)

  13. Regulating Monopolies Where does the firm produce if it is unregulated? P MC Pm ATC D MR Q Qm 13

  14. Regulating Monopolies Price Ceiling at Socially Optimal Socially Optimal = Allocative Efficiency P MC Pm ATC Pso D MR Q Qm Qso 14

  15. Regulating Monopolies Price Ceiling at Fair Return Fair Return means no economic profit P MC Pm ATC Pso Pfr D MR Q Qm Qso Qfr 15

  16. Regulating Monopolies Unregulated Socially Optimal P MC Fair Return Pm ATC Pso Pfr D MR Q Qm Qso Qfr 16

  17. Regulating a Natural Monopoly What happens if the government sets a price ceiling to get the socially optimal quantity? P The firm would make a loss and would require a subsidy MC ATC Pso MR D Q Qsocially optimal 17

  18. Price Discrimination

  19. Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Examples: • Airline Tickets (vacation vs. business) • Movie Theaters (child vs. adult) • All Coupons (spenders vs. savers) • DBHS football games (students vs. parents)

  20. PRICE DISCRIMINATION • Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. • Those with inelastic demand are charged more than those with elastic Requires the following conditions: • Must have monopoly power • Must be able to segregate the market • Consumers must NOT be able to resell product

  21. Results of Price Discrimination $10

  22. Results of Price Discrimination $10 $10 $9

  23. Results of Price Discrimination $10 $10 $9 $10 $9 $8

  24. Results of Price Discrimination $10 $10 $9 $10 $9 $8 $10 $9 $8 $7

  25. Results of Price Discrimination $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

  26. $10 $10 $9 WHEN PRICE DISCIMINATING MR = D $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

  27. Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Q Qm

  28. A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand P MC ATC D MR Q 29

  29. A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Q Qnm 30

  30. A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Q Qnm 31

  31. Can You Do The Following? 1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit

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