Monopoly †economics Essay

In this chapter, look for the answers to these questions ? Why do monopolies annul? ? Why is MR P for a monopolist? ? How do monopolies choose their P and Q? ? How do monopolies affect societys well-being? ? What can the g everywherenance do about monopolies? ? What is monetary value discrimination? Economics PRINCIPLES OF N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all(a) rights reserved 1 Introduction ? A monopoly is a starchy that is the sole vender of a product without shutdown substitutes. Why Monopolies Arise.The main cause of monopolies is barriers to en endeavour other bulletproofs cannot enter the food market. leash sources of barriers to entry 1. A single firm owns a key resource. E. g. , DeBeers owns closely of the worlds diamond mines 2. The govt gives a single firm the scoop right to bring about the good. E. g. , patents, copyright laws 2 ? In this chapter, we study monopoly and ancestry it w ith correct competition. ? The key difference A monopoly firm has market power, the office to influence the market expense of the product it snitchs. A agonistical firm has no market power.MONOPOLY MONOPOLY 3 Why Monopolies Arise3. Natural monopoly a single firm can produce the entire market Q at refuse cost than could several firms. Example 1000 homes need electricity ATC is lower if one firm services all 1000 homes than if 2 firms each service 500 homes. MONOPOLY Monopoly vs. Competition Demand Curves In a competitive market, the market demand abridge slopes downward. But the demand curve for any individual firms product is horizontal at the market legal injury. The firm can increase Q without lowering P, so MR = P for the competitive firm.4 Cost Electricity ATC slopes downward due to wide FC and scurvy MC ATC 500 1000 Q P A competitive firms demand curve $80 $50 D Q 5 MONOPOLY 1 10/23/2012 Monopoly vs. Competition Demand Curves A monopolist is the only seller, so it faces the market demand curve. To sell a larger Q, the firm must reduce P. Thus, MR ? P. P ACTIVE study A monopolys revenue Common Grounds is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the scatty spaces of the table. Q 0 1 2 3 4 5 6 P $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 7 1 TR AR n. a. MR A monopolists demand curve D Q MONOPOLY 6 What is the relation between P and AR?Between P and MR? ACTIVE LEARNING Answers Here, P = AR, equal as for a competitive firm. Here, MR P, whereas MR = P for a competitive firm. Q 0 1 2 3 4 5 6 1 Common Grounds D and MR Curves P TR $0 4 7 9 10 10 9 AR n. a. $4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 8 MR $4 3 2 1 0 1 Q P MR $4 3 2 1 0 1 $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 0 $4. 50 1 2 3 4 5 6 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 P, MR $5 4 3 2 1 0 -1 -2 -3 0 1 2 3 Demand curve (P) MR 4 5 6 7 Q 9 MONOPOLY Understanding the monopolists MR ? Increasing Q has cardinal loads on revenue ? Outp ut effect higher takings raises revenue ? equipment casualty effect lower price reduces revenue ? To sell a larger Q, the monopolist must reduce the price on all the units it sells. Profit-Maximization ? Like a competitive firm, a monopolist maximizes earnings by producing the standard where MR = MC. ? Once the monopolist identifies this quantity, it sets the highest price consumers are involuntary to pay for that quantity. ? Hence, MR P ? MR could even be negative if the price effect exceeds the output effect (e. g. , when Common Grounds increases Q from 5 to 6). 10 ? It finds this price from the D curve. MONOPOLY MONOPOLY 11 2 10/23/2012 Profit-Maximization1. The bring inmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Q Costs and Revenue MC The Monopolists Profit Costs and Revenue MC ATC P D MR Quantity As with a competitive firm, the monopolists increase equals (P ATC) x Q P ATC D MR Q Quantity Profit-maximizing output MONOPOLY 12 MONOPOLY 13 A M onopoly Does Not Have an S Curve A competitive firm ? takes P as given ? has a depict curve that shows how its Q depends on P. A monopoly firm ? is a price-maker, not a price-taker ? Q does not depend on P rather, Q and P are collectively determined by MC, MR, and the demand curve.So there is no tote up curve for monopoly. MONOPOLY 14 CASE STUDY Monopoly vs. Generic Drugs Patents on spic-and-span drugs give a temporary monopoly to the seller. Price The market for a true drug PM When the patent expires, PC = MC the market becomes competitive, generics appear. QM D MR Quantity QC MONOPOLY 15 The eudaimonia Cost of Monopoly ? Recall In a competitive market equilibrium, P = MC and total surplus is maximized. The Welfare Cost of Monopoly Competitive eqm quantity = QC P = MC total surplus is maximized Monopoly eqm quantity = QM P MC deadweight impairment Price Deadweight MC loss?In the monopoly eqm, P MR = MC ? The value to buyers of an additional unit (P) exceeds the cost of the resources needed to produce that unit (MC). ? The monopoly Q is too low could increase total surplus with a larger Q. ? Thus, monopoly results in a deadweight loss. P P = MC MC D MR QM QC Quantity MONOPOLY 16 MONOPOLY 17 3 10/23/2012 Price Discrimination ? Discrimination treating throng differently based on both(prenominal) quality, e. g. race or gender. double-dyed(a) Price Discrimination vs. single(a) Price Monopoly Here, the monopolist charges the same price (PM) to all buyers. A deadweight loss results.Price Consumer surplus Deadweight loss ? Price discrimination selling the same good at different prices to different buyers. PM MC ? The characteristic used in price discrimination is willingness to pay (WTP) ? A firm can increase profit by charging a higher price to buyers with higher WTP. Monopoly profit D MR QM MONOPOLY 18 Quantity 19 MONOPOLY Perfect Price Discrimination vs. Single Price Monopoly Here, the monopolist produces the competitive quantity, save charges each buyer his or her WTP. This is called perfect price discrimination. The monopolist captures all CS as profit.But theres no DWL. MONOPOLY Price Discrimination in the Real World ? In the true(a) world, perfect price discrimination is not possible ? No firm knows both buyers WTP ? Buyers do not announce it to sellers Price Monopoly profit ? So, firms divide customers into groups MC D MR Quantity based on some observable trait that is likely related to WTP, such as age. Q 20 MONOPOLY 21 Examples of Price Discrimination Movie tickets Discounts for seniors, students, and people who can date during weekday afternoons. They are all more likely to have lower WTP than people who pay full price on Friday night.Airline prices Discounts for Saturday-night stayovers help list business travelers, who unremarkably have higher WTP, from more price-sensitive leisure travelers. MONOPOLY 22 Examples of Price Discrimination Discount coupons People who have time to jog and organize coupons are more likely to have lower income and lower WTP than others. Need-based financial aid Low income families have lower WTP for their childrens college education. Schools price-discriminate by offering need-based aid to low income families. MONOPOLY 23 4 10/23/2012 Examples of Price DiscriminationQuantity discounts A buyers WTP a lot declines with additional units, so firms charge little per unit for large quantities than gnomish ones. Example A movie theater charges $4 for a small popcorn and $5 for a large one thats double as big. Public Policy Toward Monopolies ? Increasing competition with antitrust laws ? illegalize some anticompetitive practices, allow govt to break up monopolies. ? E. g. , Sherman Antitrust bit (1890), Clayton Act (1914) ?Regulation ? Govt agencies set the monopolists price. ? For natural monopolies, MC ATC at all Q, so marginal cost pricing would result in losses. ? If so, regulators might subsidize the monopolist or set P = ATC for nothing economic profit. M ONOPOLY 24 MONOPOLY 25 Public Policy Toward Monopolies ?Public willpower ? Example U. S. Postal Service ? Problem Public ownership is usually less efficient since no profit motive to minimize cost CONCLUSION The Prevalence of Monopoly ? Doing nothing ? The foregoing policies all have drawbacks, so the best policy may be no policy. ? In the real world, pure monopoly is rare. ? Yet, many firms have market power, due to ? selling a unique variety of a product ? having a large market share and few significant competitors ?In many such cases, most of the results from this chapter apply, including ? markup of price over marginal cost ? deadweight loss MONOPOLY 26 MONOPOLY 27 CHAPTER SUMMARY ? A monopoly firm is the sole seller in its market. Monopolies elevate due to barriers to entry, including government-granted monopolies, the control of a key resource, or economies of scale over the entire range of output. CHAPTER SUMMARY ? Monopoly firms maximize profits by producing the quantity w here marginal revenue equals marginal cost. But since marginal revenue is less than price, the monopoly price will be greater than marginal cost, leading to a deadweight loss. ?A monopoly firm faces a downward-sloping demand curve for its product. As a result, it must reduce price to sell a larger quantity, which causes marginal revenue to fall below price. 28 ? Monopoly firms (and others with market power) try to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination. 29 5 10/23/2012 CHAPTER SUMMARY ? Policymakers may move by regulating monopolies, using antitrust laws to promote competition, or by taking over the monopoly and running it. Due to problems with each of these plectrons, the best option may be to take no action. 30 6.