Imperfect Competition
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
• Opening Question
–
In your notebook,
brainstorm:
THREE similarities and two
differences between:
a) The way MONOPOLY works
and
b) The way the US economy works
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
Characteristics
of a Monopoly
Monopolistic
Competition
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
IMPERFECT
COMPETITION
Oligopoly
Monopoly
Defining Monopoly
Characteristics
of a Monopoly
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
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
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 a
Pure Monopoly
Characteristics
of a Monopoly
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
Single Seller
Asymmetric Information
No Close Substitutes
Total Control over Price (“PriceMaker” not a “Price-taker”)
Avoids Competition through
Barriers to Entry
[Remember that Santa is a
monopolist]
Barriers to Entry
Characteristics
of a Monopoly
D=AR=P > MR
•
•
•
Monopoly:
Inefficient??
Price
Discrimination
•
•
Patents, Licenses, Copyrights,
Trademarks, …
Economies of Scale
•
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Legal Barriers
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)
Terms
Characteristics
of a Monopoly
•
An industry that runs most
efficiently as a monopoly
________________________________________
•
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
Natural 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
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:
•
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
•
•
•
•
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 :(
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?
Characteristics
of a Monopoly
•
•
The Firm IS the Market
The market demand curve IS
the firm’s demand curve
D=AR=P > MR
•
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
•
•
•
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.
Why is MR below D=AR=P??
Characteristics
of a Monopoly
•
Copy this table, graph the demand
curve, then figure TR and MR.
D=AR=P > MR
Q
P
TR
MR
Monopoly Profit
Maximization
0
14
0
--
1
12
12
12
2
10
20
8
3
8
24
4
4
6
24
0
5
4
20
-4
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
Characteristics
of a Monopoly
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
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)
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
Characteristics
of a Monopoly
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
•
•
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.
Pure Monopoly:
SR PROFIT-MAXIMIZATION
Characteristics
of a Monopoly
•
–
D=AR=P > MR
Monopoly Profit
Maximization
•
•
Comparing
Monopoly to
Perfect
Competition
•
Monopoly:
Inefficient??
Price
Discrimination
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
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.
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
Comparing Monopoly to Perfect
Competition
Characteristics
of a Monopoly
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
• 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
1.
2.
3.
4.
Draw axes, label P & Q
Draw D=AR=P, then MR [MR bisects]
Draw MC (nike)
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:
•
•
•
Monopoly:
Inefficient??
Price
Discrimination
Pure Monopoly:
Steps to creating the graph
•
Qm == Q where MR=MC
Pm == D=AR=P at Quantity Qm
ATC == ATC at Quantity Qm
PROFIT or LOSS box (clearly)
Pure Monopoly:
Create your Own Graph
Characteristics
of a Monopoly
D=AR=P > MR
Monopoly Profit
Maximization
Comparing
Monopoly to
Perfect
Competition
Monopoly:
Inefficient??
Price
Discrimination
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
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
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