AP Microeconomics
12:2 Warm Up: What are the four main
market structures? How would you
describe the products in each one?
Perfect Competition &
Monopoly Compared
(1)
TAKERS
• Perfectly competitive firms are Price- _______________;
which means No one firm has price control in the market
• And P = MR
MAKERS
• Monopoly firms are Price - _____________________;
which means
The one firm is the only provider; total price control
• Therefore, P ≠ MR!!
•
Having power in a market means firms can change
price and still make profit! Firms can acquire power in
imperfectly competitive markets if they can consistently
price their goods in excess of marginal costs.
Perfect Competition &
Monopoly Compared
(2)
• A perfectly competitive firm’s [output] demand
curve is the constant MR curve; perfectly elastic
• A perfectly competitive firm’s [output] supply
curve is the firm’s MC curve at all prices above the
min. point on the AVC curve
SUPPLY
• A monopoly firm has NO _________________
curve because they are both the industry and
the firm.
DEMAND
• A monopoly firm’s ___________________
curve
dictates the both the quantity supplied and
demanded at each price.
Perfect Competition &
Monopoly Compared
• (3) The demand curve of firms in both
monopolies and perfect competition are
Negative, and downward sloping
• (4) Marginal cost curves and average cost
curves are the same shape in both market
structures:
Increasing in the short run
• (5) The optimal level of
production for ALL firms occurs
when MR = MC.
To find Q (output) always look for
Monopoly Power
2 Forms: ways to measure a firm’s power
1. Market Share
Measured by the Herfindahl Index
• This measures the size of firms in
relationship to the industry and an indicator of
the amount of competition among them
2. Pricing
Measured by the Lerner Index
•
•
•
•
•
Describes a monopoly’s price power
L = (P – MC)
P
The greater the value, the greater the price power.
In perfect competition, where P = MC, Lerner index is zero; no market
power.
Monopolies
• Monopoly demand curves are downward
sloping to the right implying that P>MR
and a pricing strategy ensues.
• The monopolist determines price and
output (optimal or best) at the intersection
of MR and MC.
• So in order to induce more sales
(increasing total revenue) monopolists will
lower price (if the product is relatively
elastic).
MONOPOLY REVENUES & COSTS
Quantity
of Output
Price
(average
revenue)
Total
Revenue
Marginal
Revenue
Average
Total Cost
Total Cost
Marginal
Cost
0
$172
$0
--
--
$100
--
1
162
162
$190
190
2
152
304
135
270
3
142
426
113.33
340
4
132
528
100
400
5
122
610
94
470
6
112
672
91.67
550
7
102
714
91.43
640
8
92
736
93.73
750
9
82
738
97.78
880
10
72
720
103
1030
Profit +
Or
Loss -
MONOPOLY REVENUES & COSTS
Quantity
of Output
Price
(average
revenue)
Total
Revenue
Marginal
Revenue
Average
Total Cost
Total Cost
Marginal
Cost
0
$172
$0
--
--
$100
--
1
162
162
$162
$190
190
2
152
304
142
135
270
3
142
426
122
113.33
340
4
132
528
102
100
400
5
122
610
82
94
470
6
112
672
62
91.67
550
7
102
714
42
91.43
640
8
92
736
22
93.73
750
9
82
738
2
97.78
880
10
72
720
-18
103
1030
Profit +
Or
Loss -
MONOPOLY REVENUES & COSTS
Quantity
of Output
Price
(average
revenue)
Total
Revenue
Marginal
Revenue
Average
Total Cost
Total Cost
Marginal
Cost
0
$172
$0
--
--
$100
--
1
162
162
$162
$190
190
$90
2
152
304
142
135
270
80
3
142
426
122
113.33
340
70
4
132
528
102
100
400
60
5
122
610
82
94
470
70
6
112
672
62
91.67
550
80
7
102
714
42
91.43
640
90
8
92
736
22
93.73
750
110
9
82
738
2
97.78
880
130
10
72
720
-18
103
1030
150
Profit +
Or
Loss -
MONOPOLY REVENUES & COSTS
Quantity
of Output
Price
(average
revenue)
Total
Revenue
Marginal
Revenue
Average
Total Cost
Total Cost
Marginal
Cost
Profit +
Or
Loss -
0
$172
$0
--
--
$100
--
-$100
1
162
162
$162
$190
190
$90
-28
2
152
304
142
135
270
80
34
3
142
426
122
113.33
340
70
86
4
132
528
102
100
400
60
128
5
122
610
82
94
470
70
140
6
112
672
62
91.67
550
80
122
7
102
714
42
91.43
640
90
74
8
92
736
22
93.73
750
110
-14
9
82
738
2
97.78
880
130
-142
10
72
720
-18
103
1030
150
-310
12:3 Identify The Market Structures
of the following Products:
MONOPOLY REVENUES & COSTS
Dollars
$200
150
200
50
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
$750
500
250
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MONOPOLY REVENUES & COSTS
Elastic
Dollars
$200
150
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
$750
500
TR
250
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MONOPOLY REVENUES & COSTS
Elastic
Inelastic
Dollars
$200
150
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
$750
500
TR
250
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Underneath Graphs:
• When the demand for the
product is ELASTIC, the
monopolist should lower prices
to raise TR.
• When the demand for the
product is INELASTIC, the
monopolist should raise prices
to raise TR.
How Do Monopolists Determine Profit?
Price &
Cost
Find
MC
PX
The MR curve
should hit the xProfitaxis at the
demand curves
Mid-Point
revenue
At The
that
Quantity
Where
MC
earned
from
is also
the the
= MR to
q.d.quantity
determines
the determine
profit above
demanded
and
ATC
quantity
thus
price
ATC
Downward
sloping demand
curve, whatever
is demanded the
monopolist will
supply
MR
QX
Demand
Quantity
How do Monopolists Determine
Profit?
Look For:
#1: Where MC = MR
(optimal point of production, therefore
quantity supplied)
#2: That quantities intersection with both the
demand curve and ATC curve
#3: Price on Demand Curve & Price on ATC
curve
Monopolists realize profits and set price where
MC = MR and P > MR!!!
Contrasts to Perfect Competition
1.Output is restricted
2.Price is higher
3.Output is lower, which
leads to:
4.Misallocation of resources
Contrasts to Perfect Competition
5. Reduction of
Consumer
Price
Surplus
•{Review of Consumer
Surplus: marginal utility
is greater than price
PX
and people who are
willing to pay higher
than the market price Producer
Surplus
for a good “save”
money} Looks Like:
Consumer
Surplus
S
D
Quantity
Contrasts to Perfect Competition
6. Monopolists receive a rent
{receives more than
contributes to production}
7. Accruement of deadweight loss
{wasted resources}
Dead weight loss; monopolists do not have
to conserve resources!! They have no competition
P
MC
Price and Costs
Consumer
Surplus
Wasted
Resources
P1
ATC
Profit
Costs
MR
Q1
D
Q
Therefore, Monopolies are powerful but are
likely to show inefficiencies!!!
P
MR =
MC
Monopolists
Price
Dilemma of
Regulation:
Fair-Return
Which Price?
Price and Costs
Price
Normal Profit Only
Pm
Socially-Optimum
Price
ATC
MC
Pf
Ps
D
MR
Q
Q
Q
Q
Is there a need for government to
regulate this market structure?