AP Micro Pure Monopoly

• 1.Pure Monopol y 24C H A P T E R

2. Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Pure Monopoly: Single Seller No Close Substitutes Price Maker Blocked Entry Nonprice Competition 3. MONOPOLY EXAMPLES Pure Monopoly Regulated Monopoly Near Monopolies Dual Objectives of the Study Monopoly as a Market Structure To Better Understand Other Market 4. BARRIERS TO ENTRY Economies of Scale The Natural Monopoly Case Minimum Efficient Scale Legal Barriers to Entry Patents Licenses Ownership or Control of Essential Resources Pricing and Other Strategic Barriers to Entry 5. AverageTotalCost Quantity $20 15 10 0 50 100 200 ATC If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly. THE NATURAL MONOPOLY CASE 6. MONOPOLY DEMAND 3 Basic Assumptions: Monopoly Status is Secure No Governmental Regulation Firm Charges the Same Price for all Units Sold Market Demand Curve is the Firms Demand Curve 7. MONOPOLY DEMAND 1 2 3 4 5 6 P Q $142 132 D As price decreases from $142 to $132... Loss = $30 Gain = $132 but revenue will increase with the additional unit sold. 8. MONOPOLY DEMAND 1 2 3 4 5 6 P Q $142 132 D As price decreases from $142 to $132... Loss = $30 Gain = $132 but revenue will increase with the additional unit sold. Marginal Revenue $142 - $30 = $102 will necessarily be less than price $132 9. MONOPOLY REVENUES & COSTS Marginal Revenue 0 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 $ 0 - $100 Average Total Cost Total Cost $100 Revenue Data Cost Data x = - = 10. 0 $172 $ 0 - $100$100 MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 90 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 $ 0 162 $162 - $100 - 28 Average Total Cost $190.00 Total Cost $100 190 ] ] Revenue Data Cost Data x = - = MR = $162 0 = $162 MC = $190 100 = $90 MR > MC Loss Improvement from -$100 to -$28 Check next unit of output! 11. MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 90 80 70 60 70 80 90 110 130 150 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 152 142 132 122 112 102 92 82 72 $ 0 162 304 426 528 610 672 714 736 738 720 $162 142 122 102 82 62 42 22 2 - 18 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Average Total Cost $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00 Total Cost $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Revenue Data Cost Data 12. MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 90 80 70 60 70 80 90 110 130 150 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 152 142 132 122 112 102 92 82 72 $ 0 162 304 426 528 610 672 714 736 738 720 $162 142 122 102 82 62 42 22 2 - 18 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Average Total Cost $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00 Total Cost $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Revenue Data Cost Data Can you see profit maximization? MR > = MC 13. MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 90 80 70 60 70 80 90 110 130 150 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 152 142 132 122 112 102 92 82 72 $ 0 162 304 426 528 610 672 714 736 738 720 $162 142 122 102 82 62 42 22 2 - 18 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Average Total Cost $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00 Total Cost $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Revenue Data Cost Data 14. MONOPOLY REVENUES & COSTS DollarsDollars $200 150 200 50 $750 500 250 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q 15. MONOPOLY REVENUES & COSTS DollarsDollars $200 150 200 50 $750 500 250 MR Elastic 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR Q 16. MONOPOLY REVENUES & COSTS Q DollarsDollars $200 150 200 50 $750 500 250 TR MR D InelasticElastic 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 17. OUTPUT AND PRICE DETERMINATION Cost Data MR = MC Rule No Monopoly Supply Curve Monopoly Pricing Misconceptions Not Highest Price Total, Not Unit, Profit Possibility of Losses Graphically 18. Profit Maximization Under Monopoly D MC ATC MR $94 $122 Profit MR = MC Profit Per Unit OUTPUT AND PRICE DETERMINATION Q 200 175 150 125 100 75 50 25 0 1 2 3 4 5 6 7 8 9 10 Price,costs,andrevenueRemember the MR=MC Rule? 19. Profit Maximization Under Monopoly D MC ATC MR $94 $122 Profit MR = MC Profit Per Unit OUTPUT AND PRICE DETERMINATION Q 200 175 150 125 100 75 50 25 0 1 2 3 4 5 6 7 8 9 10 Price,costs,andrevenue 20. Loss Minimization Under Monopoly D MC ATC MR A Pm Loss MR = MC Loss Per Unit OUTPUT AND PRICE DETERMINATION Q 200 175 150 125 100 75 50 25 0 1 2 3 4 5 6 7 8 9 10 Price,costs,andrevenue AVC Qm V Since Pm exceeds AVC, the firm will produce 21. Loss Minimization Under Monopoly D MC ATC MR A Pm Loss MR = MC Loss Per Unit OUTPUT AND PRICE DETERMINATION Q 200 175 150 125 100 75 50 25 0 1 2 3 4 5 6 7 8 9 10 Price,costs,andrevenue AVC Qm V What are the Economic Effects of Monopoly? 22. Q INEFFICIENCY OF PURE MONOPOLY P D MR S = MC Pc Pm QcQm At MR=MC A monopolist will sell less units at a higher price than in competition An industry in pure competition sells where supply and demand are equal 23. Q INEFFICIENCY OF PURE MONOPOLY P D MR S = MC Pc Pm QcQm At MR=MC A monopolist will sell less units at a higher price than in competition Monopoly pricing effectively creates an income transfer from buyers to the seller! 24. COST COMPLICATIONS Averagetotalcosts Quantity Average Total Costs X X Q1 Q2 ATCx ATC1 ATC2 ATCx Economies of Scale Simultaneous Consumption Network Effects X-Inefficiency Inefficient internal operation leads to higher-than- necessary costs 25. COST COMPLICATIONS Economies of Scale Simultaneous Consumption Network Effects X-Inefficiency Rent-Seeking Expenditures Rent-Seeking Behavior Technological Advance Assessment and Policy Option Antitrust Action Regulate Natural Monopoly Ignore it, if it is Short-Lived 26. Conditions Monopoly Power Market Segregation No Resale Consequences More Profit More Production PRICE DISCRIMINATION Graphically 27. Q D MR MC ATC P Q1 PriceandCosts Economic profits with a single MR=MC price PRICE DISCRIMINATION 28. Q D MC ATC P Q1 PriceandCosts PRICE DISCRIMINATION Q2 A perfectly discriminating monopolist has MR=D, producing more product and more profit! MR=D 29. Q D MC ATC P Q1 PriceandCosts Economic profits with price discrimination PRICE DISCRIMINATION Q2 MR=D 30. Natural Monopolies Rate Regulation Socially Optimum Price P = MC Fair-Return Price P = ATC Dilemma of Regulation REGULATED MONOPOLY Graphically 31. REGULATED MONOPOLY Q D MR MC ATC P PriceandCosts Monopoly Price MR = MC Qm Pm 32. REGULATED MONOPOLY Q D MR MC ATC P PriceandCosts Fair-Return Price Normal Profit Only Qf Pf 33. REGULATED MONOPOLY Q D MR MC ATC P PriceandCosts Socially-Optimum Price P = MC Qr Pr 34. REGULATED MONOPOLY Q D MR MC ATC PPriceandCosts MR = MC Fair-Return Price Socially-Optimum Price Qm Qf Qr Dilemma of Regulation Which Price? Pm Pf Pr 35. Monopolistic Competition & Oligopoly Chapter 25 Next