Post on 17-Dec-2015
Unit 4: Imperfect
Competition
1
FOUR MARKET STRUCTURESPerfect
CompetitionPure
MonopolyMonopolisticCompetition Oligopoly
Imperfect Competition
4
5 Characteristics of a Monopoly1. Single Seller One firm controls the vast majority of a market The firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker” The firm can manipulate the price by changing the
quantity it produces (ie. shifting the supply curve to the left).
Ex: California electric companies
4. High Barriers to Entry New firms can NOT enter market No immediate competitors Firm can make profit in the long-run
5. Some “Nonprice” Competition Despite having no close competitors, monopolies still
advertise their products in an effort to increase demand.
5
What do you already know about monopolies?
True or False?1. All monopolies make a profit.
2. Monopolies are usually efficient.
3. All monopolies are bad for the economy.
4. All monopolies are illegal.
5. Monopolies charge the highest price possible
6. The government never prevents monopolies from forming.
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Examples of Monopolies
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4 types of monopolies
Geographical
Technological
Government
Natural
4 types of monopolies
Geographical
Technological
Government
Natural
Location or control of resources limits competition and leads to one supplier.
Ex: Nowhere gas stations, De Beers Diamonds, San Diego Chargers, Cable TV, Qualcomm Hot Dogs…
4 types of monopolies
Geographical Technological Governmen
tNatural
Location or control of resources limits competition and leads to one supplier.
Ex: Nowhere gas stations, De Beers Diamonds, San Diego Chargers, Cable TV, Qualcomm Hot Dogs…
Patents and widespread availability of certain products lead to only one major firm controlling a market.
Ex: Microsoft, Intel, Frisbee, Band-Aide…
4 types of monopolies
Geographical
Technological Governme
nt
Natural
Location or control of resources limits competition and leads to one supplier.
Ex: Nowhere gas stations, De Beers Diamonds, San Diego Chargers, Cable TV, Qualcomm Hot Dogs…
Patents and widespread availability of certain products lead to only one major firm controlling a market.
Ex: Microsoft, Intel, Frisbee, Band-Aide…
• Government allows monopoly for public benefits or to stimulate innovation.
• The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)
Ex: water company, firefighters, the army, pharmaceutical drugs, rubix cubes…
4 types of monopolies
Geographical
Technological
Government
Natural
Location or control of resources limits competition and leads to one supplier.
Ex: Nowhere gas stations, De Beers Diamonds, San Diego Chargers, Cable TV, Qualcomm Hot Dogs…
Patents and widespread availability of certain products lead to only one major firm controlling a market.
Ex: Microsoft, Intel, Frisbee, Band-Aide…
• Government allows monopoly for public benefits or to stimulate innovation.
• The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)
Ex: water company, firefighters, the army, pharmaceutical drugs, rubix cubes…
• Economies of scale make it impractical to have smaller firms.
• Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost.
Ex: Electric Companies (SDGE) If there were three competing
electric companies they would have higher costs.
Having only one electric company keeps prices low
Good news…1. Only ONE graph because the
firm IS the industry.
2. The cost curves are the same
3. The MR=MC rule still applies
4. Shut down rule still applies
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Drawing Monopolies
The Main Difference
• Monopolies (and all imperfectly competitive firms) have downward sloping demand curve.
• Which means, to sell more a firm must lower its price.
• This changes MR…
THE MARGINAL REVENUE DOES NOT EQUAL THE PRICE!
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ATC
15
Combine the Demand of an industry with the costs of a firm.
D
Quantity
Co
sts
(do
llar
s)MC
MR
MR < DemandWhat about MR?
P Qd TR MR$11 0 0 -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
$4 7 28 -2
Why is MR less than Demand?
16$4 $4 $4 $4 $4 $4 $4
$5$5 $5 $5 $5 $5
$6 $6 $6 $6 $6
$7 $7 $7 $7
$8 $8 $8
$9 $9
$10
P Qd TR MR$11 0 0 -
$10 1 10 10
$9 2 18 8
$8 3 24 6
$7 4 28 4
$6 5 30 2
$5 6 30 0
$4 7 28 -2
Why is MR less than Demand?
17$4 $4 $4 $4 $4 $4 $4
$5$5 $5 $5 $5 $5
$6 $6 $6 $6 $6
$7 $7 $7 $7
$8 $8 $8
$9 $9
$10
MR IS LESS THAN PRICE
Revenue will increase with the additional unit sold.
But a lower price results in a loss of the $30 that was earned when price was $10 higher.
Marginal Revenue is ADDITIONAL REVENUE =?
= $360-$300 = $60
= $90-$30
TR=$300
Why is MR below Demand?
0 1 2 3 4 5
P
Q
DTR=$360
18
Loss=$30
Gain$90
$100
90
60
40
How many units can be sold for a price of $100? As price decreases from $100 to $90...
TR=$360
Why is MR below Demand?
0 1 2 3 4 5
P
Q
D
As price continuously decreases from $90 to $80,
Revenue will…Increase
How about the loss, gain & MR?
MR= $400-$360= $40= $80-$40
TR=$400
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Loss=$40
Gain$80
MR
This is why MR is below Demand
$100 90
80
60
40
MR CURVE IS LESS THAN
DEMAND CURVE!!!
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Calculating Marginal Revenue
Quantity Price TR MR
0 $16 0 -
1 15 15 15
2 14 28 13
3 13 39 11
4 12 48 9
5 11 55 7
6 10 60 5
7 9 63 3
8 8 64 1
9 7 63 -1
10 6 60 -3
Calculate TR and Marginal Revenue
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Quantity Price TR MR
0 $16 0 -
1 15 15
2 14 28
3 13 39
4 12 48
5 11 55
6 10 60
7 9 63
8 8 64
9 7 63
10 6 60
Quantity Price TR MR
0 $16 0 -
1 15
2 14
3 13
4 12
5 11
6 10
7 9
8 8
9 7
10 6
Quantity Price TR MR
0 $16 0 -
1 15 15 15
2 14 28 13
3 13 39 11
4 12 48 9
5 11 55 7
6 10 60 5
7 9 63 3
8 8 64 1
9 7 63 -1
10 6 60 -3
Q
Do
llar
sD
oll
ars
$15
10
5
$64
40
20
TR
D0 1 2 3 4 5 6 7 8 9 10 11 12 Q
MR
Demand & MR CurvesWhat happens to TR when MR hits
zero?
When MR goes negative,
TR will fall
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Plot the Demand, MR & TR Curves
0 1 2 3 4 5 6 7 8 9 10 11 12
Elastic vs. Inelastic Range of Demand Curve
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Q
Do
llar
sD
oll
ars
TR
DQ
MR
240 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Elastic vs. Inelastic Range
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Elastic InelasticTotal Revenue Test
If price & TR demand is…
$200
150
100
50
$750
500
250INELASTICA monopoly will
only produce in the elastic
range
ELASTIC
Total Revenue Test
If price & TR demand is…
What output should this monopoly produce?MR = MC
Q 0 1 2 3 4 5 6 7 8 9 10
Pri
ce
$9
8
7
6
5
4
3
2
How much is the TR, TC and Profit or Loss?
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MR
D
MC ATC
Conclusion: A monopolists
produces where MR=MC, but charges the
price consumer are willing to pay identified
by the demand curve.
Profit =$6
Maximizing Profit
MR
Loss
Q 0 1 2 3 4 5 6 7 8 9
D
$90
80
70
60
50
40
30
20
10
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MC
What if cost is higher?How much is the TR, TC and Profit or
Loss?ATC
AVC
Minimum AVC is shut down
point
Costs
Price
TR=$780
MR
Q 0 1 2 3 4 5 6 7 8 9
Pri
ce, c
ost
s, a
nd
rev
enu
e
D
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MC
1. TR =2. TC =3. Profit/Loss = 4. Profit/Loss per
Unit =ATC
$175
150
125
100
75
50
$130$110
----------------- $780----------------- $600 ---------- $180 --- $30
TC=$600
Profit=$180
Quiz Time
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Are Monopolies Efficient?
Q
Efficiency of Perfect Competition
P
D
S = MC
Pc
Qc
An industry in perfect
competitionsells where supply
&demand are equal
CS
PS
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CS and PS of a Perfect Competition
Pm
QmQ
INEFFICIENCY OF MONOPOLY
P
D
S = MC
Pc
Qc 30MR
At MR=MC,A monopolist willproduce less and
charge higher price
CS
PS
Result is DEADWEIGHT
LOSS to society
CS and PS of a MonopolyMonopolies underproduce & over charge, decreasing CS & increasing
PS.
MONOPOLIES AND EFFICIENCY
Productive EfficiencyThe production of a good in a least costly way. (minimum amount of resources are being used)
Graphically it is where…
Price = Minimum
ATC
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Allocative EfficiencyThe apportionment of resources towards the production of products most wanted by society (as measured by their price).
Graphically it is where…
Price = MC
D
MC
Q
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8
Pri
ce,
co
sts
, an
d r
ev
enu
e
Are Monopolies Efficient?
ATC
32
MR
Does Price = Minimum ATC?
Does Price = MC?
Monopolies are NOT productive
efficient!
Monopolies are NOT allocative
efficient!
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Are Monopolies Efficient?
Monopolies are inefficient because…
1. They charge a higher price2. They don’t produce enough
No allocative efficiency3. They produce at higher costs
No productive efficiency4. They have little incentive to
innovate Why?Because there is little external
pressure to be efficient
Monopolies are NOT efficient!
QDMR
MC
ATC
P
Natural Monopoly
34Qsocially optimal
One firm can produce the socially optimal quantity at the lowest cost due to economies scale.
It is better to have only one firm because ATC is
falling at socially optimal quantity
Regulating Monopolies
How do they regulate?1. Use Price controls:
a. Price Ceiling b. Price Floor2. Why don’t taxes work?
Taxes limit supply and that’s the problem
Why would the government regulate an monopoly? 1. To keep prices low 2. To make monopolies efficient
Regulating Monopolies
The firm would make a loss and would require a subsidy
QD
MR
MCATC
P
Pri
ce a
nd
Co
sts
38
REGULATING MONOPOLY
Qm
Pm
Dilemma of Regulation Which Price?
Qs
Ps
Qf
Pf
P = MCSocially-
Optimum Price
What happens if the government sets a price ceiling to get the socially optimal
quantity?
Fair-Return PriceNormal Profit Only
TR = TCMonopoly or Unregulated
PriceMR = MC
Socially-Optimum Price
P = MC (Allocative Efficiency)
OR
Fair-Return PriceP = ATC (Normal Profit)
Where should the government place the price ceiling?
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Lump Sum vs. Per Unit
Taxes and Subsidies
40
ACDC Econ Video
2007 FRQ #1
Price Discrimination
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Conditions• Firm must have monopoly
power• Firm must be able to
segregate the market • Consumers must not be able
to resell product
Practice of selling specific products to different buyers at different prices.
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PRICE DISCRIMINATION
Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.
Those with elastic demand are charged less than those with inelastic.
Examples: • Airline Tickets (vacation vs. business)• Movie Theaters (child vs. adult) • All Coupons (spenders vs. savers) • DHS soda machine (students vs.
teachers) 44
PRICE DISCRIMINATION
Q
P
Q1
Price
MonopolyNON-PRICE DISCRIMINATION
45
DMR
MC
ATC
Costs
Economic profits with a single MR=MC
price
MR
QD
MCP
Q1
Pri
ce a
nd
Co
sts
Q2
A perfectly discriminating monopolist has MR=D, producing more product and more
profit!
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PRICE DISCRIMINATION
MR’
ATC
Economic profits with
price discrimination
What’s the Point?Perfectly price discriminating firms:•Make more profit•Produce more•Produce at allocative efficiency
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A perfectly discriminating can charge each person differently so the Marginal Revenue
= Demand
Price Discrimination results in several prices, more profit, No
CS, and a higher socially optimal quantity
PRICE DISCRIMINATION
Can You Do The Following?
1. Draw a monopoly making a profit identify price, quantity, and profit.
2. Draw a perfectly competitive industry firm at long-run equilibrium
3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit
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P
Q
P
Q5000
D
S
$15 $15
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MR=D
D1
8
ATC
Industry Firm(Price Taker)
MC
Side-by-side graph for perfectly completive industry and firm in the LONG RUN
Is the firm making a profit or a loss? Why?