Unit 4: Imperfect Competition 1 FOUR MARKET STRUCTURES Perfect Competition Pure Monopoly...

Unit 4: Imperfect

Competition

1

FOUR MARKET STRUCTURESPerfect

CompetitionPure

MonopolyMonopolisticCompetition Oligopoly

Imperfect Competition

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.

6

Examples of Monopolies

4 types of monopolies

Geographical

Technological

Government

Natural


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…


Geographical Technological Governmen

tNatural



Patents and widespread availability of certain products lead to only one major firm controlling a market.

Ex: Microsoft, Intel, Frisbee, Band-Aide…


Geographical

Technological Governme

nt

Natural





• 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…


Geographical

Technological

Government

Natural





• 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

13

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!

14

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

19

Loss=$40

Gain$80

MR

This is why MR is below Demand

$100 90

80

60

40

MR CURVE IS LESS THAN

DEMAND CURVE!!!

20

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

21


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


0 $16 0 -

1 15

2 14

3 13

4 12

5 11

6 10

7 9

8 8

9 7

10 6


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

22

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

23

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?

25

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

26

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

27

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

28

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

29

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

31

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


ATC

32

MR

Does Price = Minimum ATC?

Does Price = MC?

Monopolies are NOT productive

efficient!

Monopolies are NOT allocative

efficient!

33


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?

39

Lump Sum vs. Per Unit

Taxes and Subsidies

40

ACDC Econ Video

2007 FRQ #1

Price Discrimination

42

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


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!

46


MR’

ATC

Economic profits with

price discrimination

What’s the Point?Perfectly price discriminating firms:•Make more profit•Produce more•Produce at allocative efficiency

47

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


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

48

P

Q

P

Q5000

D

S

$15 $15

49

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?

Unit 4: Imperfect Competition 1 FOUR MARKET STRUCTURES Perfect Competition Pure Monopoly...

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Transcript of Unit 4: Imperfect Competition 1 FOUR MARKET STRUCTURES Perfect Competition Pure Monopoly...