econ 503 discussion board post
kentucky79
Tucker.Ch09_LECTURE_SLIDES_EFT_9e.ppt*
Chapter 9
Monopoly
Lecture Slides
Economics for Today
Irvin B. Tucker
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What will I learn in this chapter?
- How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is a monopoly?
1. Single seller
2. Unique product
3. Impossible entry into the market
A market structure characterized by:
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What does it mean to have a unique product?
- There are no close substitutes for the monopolist’s product
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- Ownership of a Vital Resource
- Legal Barriers
- Economies of Scale
What are major barriers that prevent new firms from entering and competing with a monopolist?
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is the advantage of economies of scale?
- Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is a
natural monopoly?
- An industry in which the long-run average cost of production declines throughout the entire market
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is unique about a natural monopoly?
- A single firm will produce output at a lower per-unit cost than two or more firms in the industry
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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20
15
10
5
20
30
35
40
60
80
100
Exhibit 1 Minimizing Costs in a Natural Monopoly
Cost per Unit (dollars)
25
1 firm
2 firms
5 firms
Quantity of Output
LRAC
0
50
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10
30
70
90
110
120
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What is a network good?
A good that increases in value to each user as the total number of users increase. As a result, a firm can achieve economies of scale. Examples include Facebook and Match.com.
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is a price maker?
- A firm that faces a downward-sloping demand curve
- As a result, a monopolist can choose its price along the demand curve.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is the difference between monopoly and perfect competition?
- The D and MR curves of the monopolist are downward sloping; in perfect competition they are equal and horizontal
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is unique about the demand curve for a monopolist?
- The monopolist demand curve and the industry demand curve are one in the same
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Why is MR < P for all but the first unit of output?
- Observe the relationship between P and MR in Exhibit 2.
- To sell 1 unit, P=$138 and TR=$138.
- To sell 2 units, P=$125 and TR=$250.
- Compute that TR increases $112 ($250-$125), which means MR=$112.
- Notice that at 2 units P=$125>$112 and this gap widens as the units increase.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Exhibit 2 Demand, Marginal Revenue, and Total Revenue for Computech as a Monopolist
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-100
-150
-200
2
4
6
0
50
100
150
10
12
14
Exhibit 2(a) Monopolist
Price & Marginal Revenue (dollars)
Demand
Marginal revenue
Quantity of Output (units per hour)
8
*
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8
200
100
2
4
6
300
400
10
12
14
16
18
Quantity of Output (units per hour)
Total Revenue (dollars)
0
Total Revenue
Exhibit 2(b) Total Revenue Curve
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What two methods does a monopolist use to maximize profit or minimize losses?
- Total revenue method
- MR = MC method
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Exhibit 4 Short-Run Profit Maximization for a Monopolist Using the Total Revenue - Total Cost Method
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Exhibit 5 Short-Run Profit Maximization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Exhibit 6 Short-Run Loss Minimization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Can a monopolist make a profit in the long-run?
- If the positions of a monopolist’s demand and cost curves give it a profit and nothing changes these curves, it can make a profit in the long-run
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What is
price discrimination?
- The practice of a seller charging different prices for the same product not justified by cost differences
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is arbitrage?
- The practice of earning a profit by buying a good at a low price and reselling the good at a higher price
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 7 Price Discrimination
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Is price
discrimination unfair?
- At the lower price, many buyers benefit from the discrimination by not being excluded from purchasing the product if a higher price were charged.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Is perfect
competition efficient?
- A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Is monopoly efficient?
- A monopolist is inefficient because it sets P>MR=MC and resources are underallocated to the production of its product
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 8 Comparing a Perfectly Competitive Firm and a Monopolist
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How does monopoly harm consumers?
- It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Qm
S=MC
MR=MC
D
Pm
Exhibit 9 Impact of Monopolizing an Industry
Pc
Qc
MR
Quantity of Output
Price, Costs, and Revenue (dollars)
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is the case against monopoly?
- Higher price
- Charges a Price > MC
- Long-run economic profit
- Alters the distribution of income to favor monopolist
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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