Post on 20-Jan-2016
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Imperfect Competition
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Imperfect Competition
• Opening Question– In your notebook, brainstorm:THREE similarities and two
differences between:
a) The way MONOPOLY works
andb) The way the US economy works
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Market Structures:Sellers (top), and Buyers (bottom)
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Defining Imperfect Competition
IMPERFECT COMPETITION
Monopolistic Competition
Oligopoly
Monopoly
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Defining Monopoly
MONOPOLY (noun) • Plural: monopolies
– Etymology:• Latin monopolium, from Greek
monopōlion, from mon- (one) + pōleo (to sell or to barter)
– First recorded use (1534)
– Definition:• A pure monopoly is an industry with
exactly ONE firm that produces the market’s entire quantity supplied
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Preview:Pure Monopoly (Graph)
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Characteristics of aPure Monopoly
Single SellerAsymmetric InformationNo Close SubstitutesTotal Control over Price (“Price-
Maker” not a “Price-taker”)Avoids Competition through Barriers
to Entry
[Remember that Santa is a monopolist]
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Barriers to Entry• Legal Barriers
• Patents, Licenses, Copyrights, Trademarks, …
• Economies of Scale• Keeps competition out, since the per unit
cost for small companies are much higher than the larger, established monopolist.
• Control of Key Resource• Can keep competitors from producing
• Network Superiority• If the value to consumers increases as more
people use it (ie. Microsoft Office programs… in terms of compatibility and familiarity)
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Terms
• Natural Monopoly• An industry that runs most efficiently
as a monopoly________________________________________
• Regulated Monopoly• When government places regulations
upon the monopolist (sets price limits or output quotas)
• Unregulated Monopoly• A monopolist free from government
regulation. If unregulated, The firm will set the price that will maximize PROFITS
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Imperfect Competition:What Stays the Same??
• The graph for IMPERFECT COMPETITION looks a bit different than Perfect Competition - but many of the rules are still true.
• These rules still apply for all market structures:
• Profit-Maximization still occurs at MR=MC
• All of our Cost Curves still look & function the same (MC, ATC, AVC, …)
• D=AR=P (but no more MR. DARP :(
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
MR < D=AR=P… but why?
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Why does the D=AR=P curve slope downward?
• The Firm IS the Market• The market demand curve IS the
firm’s demand curve• There are no alternatives to a pure
monopoly.• If the monopolist raises the price,
quantity sold declines (at market & firm [same])
• The Monopolist can set the price OR the output, but not both.
• The Consumers will respond to whatever the Monopolist sets.
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Why is MR below D=AR=P??• Copy this table, graph the demand
curve, then figure TR and MR.
Q P
0 14
1 12
2 10
3 8
4 6
5 4
TR
0
12
20
24
24
20
MR
--
12
8
4
0
-4
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Why is MR below D=AR=P??
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Monopolist operates in the ELASTIC part of the curve
• An advanced concept:– When MR=0, TR is maximized.– This is the point where Demand is
UNIT ELASTIC.– Monopolists will always produce less
than this (in elastic part of the curve)
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Monopolist operates in the ELASTIC part of the curve
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:SR PROFIT-MAXIMIZATION• The monopolist expands
production until MR=MC• At this output level, the demand
curve determines the price that must be charged for consumers to purchase that quantity.
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:SR PROFIT-MAXIMIZATION• RULES FOR BREAKEVEN &
SHUTDOWN– It’s easy - they stay the same…
• If P > ATC == + Ec. Profits• If ATC > P >AVC == Neg. Ec.
Profits• If AVC > P == Firm will shut
down production
• Breakeven point: P=ATC• Shutdown point: P=AVC
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:in the Long Run
• In the short-run, a monopoly can make profits or losses.
• In the long-run, the monopolist can still earn positive economic profits… and typically will.
• But the Monopoly WILL go out of business if it cannot earn a normal profit in the long-run.
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Comparing Monopoly to Perfect Competition
• Compared to a firm in Perfect Competition… A monopolist produces a smaller quantity, charges a higher price, and can earn a positive economic profit (in Short-Run and Long-Run)
• Compared to a firm in Perfect Competition… A monopolist produces a smaller quantity, charges a higher price, and can earn a positive economic profit (in Short-Run and Long-Run)
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:Steps to creating the graph
1. Draw axes, label P & Q2. Draw D=AR=P, then MR [MR bisects]
3. Draw MC (nike)4. Draw ATC & AVC (location will
depend on info. Given whether making profit/loss/norm. profit)
5. Draw vertical dotted line through MR=MC (profit-max)
6. Label:• Qm == Q where MR=MC• Pm == D=AR=P at Quantity Qm
• ATC == ATC at Quantity Qm
• PROFIT or LOSS box (clearly)
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:Create your Own Graph
1. Keeping these steps in mind, draw your own MONOPOLY graph in your notebook.
2. When done, determine if this monopoly is earning:
• Positive economic profit• Normal profit• Negative economic profit (loss)• Shutting down
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:Working with the Graph
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Pure Monopoly:Working with the Graph
• Identify:(a) Profit, (b) C.S., (c) DWL
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination
Characteristics of a Monopoly
D=AR=P > MR
Monopoly Profit Maximization
Comparing Monopoly to
Perfect Competition
Monopoly: Inefficient??
Price Discrimination