Unit 4:
Imperfect
Competition
1
REVIEW
Name That Concept
Rules:
1. Cannot use the word(s)
2. Focus on the concept not word
Ex: Price Maker
2
Name That Concept
1. Monopoly
2. Imperfect Competition
3. Barriers to Entry
4. Dead Weight Loss
5. Productive Efficiency
3
Name That Concept
1. Marginal Revenue
2. MR = MC
3. Shut down rule
4. Natural Monopoly
5. Allocative Efficiency
4
Conclusion: A monopoly produces where MR=MC,
buts charges the set by the demand curve.
How much is the TR, TC and Profit or Loss?
P
MC
ATC
$10
Profit =$20
9
8
7
6
D
5
MR
16 17 18 19 20
Q
5
Elastic and Inelastic Range
P
Total Revenue Test
If price falls and TR
increases then
demand is elastic.
Elastic
Inelastic
$15
10
5
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Total Revenue Test
If price falls and
TR falls then
demand is inelastic.
$64
40
20
1 2 3 4 5 6 7 8
Q
A monopoly
MR
will only
produce in
the elastic
range
TR
Q
6
9 10 11 12 13 14 15 16 17 18
Are Monopolies
Efficient?
7
Monopolies are inefficient because
they…
1. Charge a higher price
2. Don’t produce enough
• Not allocatively efficiency
3. Produce at higher costs
• Not productively efficiency
4. Have little incentive to innovate
Why?
Because there is little external pressure to
be efficient
8
Monopolies vs. Perfect Competition
Where is CS
and PS for a
monopoly?
P
S = MC
CS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
Pm
PS
D
MR
Qm
Q
9
Regulating
Monopolies
10
What do you think?
Monopolies are often regulated by the
government. That means that the government
sets the price at which a monopoly can
operate.
Look at a monopoly graph. Where might a
government place a price ceiling. Why would
it place a price ceiling there?
Why Regulate?
Why would the government regulate a
monopoly?
1. To keep prices low
2. To make monopolies efficient
How do they regulate?
•Use Price controls: Price Ceilings
•Why don’t taxes work?
•Taxes limit supply and that’s the problem
12
Where should the government
place the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency)
OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
13
Regulating Monopolies
Where does the firm produce if it is
unregulated?
P
MC
Pm
ATC
D
MR
Qm
Q
14
Regulating Monopolies
PriceOptimal
Ceiling at
Socially Optimal
Socially
= Allocative
Efficiency
P
MC
Pm
Pso
ATC
D
MR
Qm
Qso
Q
15
Regulating Monopolies
Price Ceiling
Returnprofit
Fair Return
meansat
noFair
economic
P
MC
Pm
Pso
Pfr
ATC
D
MR
Qm
Qso Qfr
Q
16
Regulating Monopolies
Unregulated
P
Socially
Optimal MC
Fair
Return
Pm
Pso
Pfr
ATC
D
MR
Qm
Qso Qfr
Q
17
Natural Monopoly
One firm can produce the socially optimal quantity
at the lowest cost due to economies scale.
P
It is better to have only
one firm because ATC is
falling at socially
optimal quantity
MC
ATC
MR
D
Qsocially optimal Q
18
Price
Discrimination
19
Brain Dump
•
•
•
•
•
•
•
•
Monopoly characteristics & causes
Monopoly graph
Total revenue test
Elastic v. inelastic range of a monopoly
Monopoly efficiency
Socially-optimal price
Fair-return price
Natural monopoly
20
Price Discrimination
• Think of a time when you paid a
different price for a good than someone
else…for the exact same thing.
– Why does that occur?
– How does that occur?
– Who does that benefit?
21
Price Discrimination
Definition:
Practice of selling the same products
to different buyers at different prices
Examples:
•Airline Tickets (vacation vs. business)
•Movie Theaters (child vs. adult)
•All Coupons (spenders vs. savers)
•SPHS football games (students vs.
parents)
22
PRICE DISCRIMINATION
•Price discrimination seeks to charge each
consumer what they are willing to pay in an
effort to increase profits.
•Those with inelastic demand are charged
more than those with elastic
Requires the following conditions:
1. Must have monopoly power
2. Must be able to segregate the market
3. Consumers must NOT be able to resell
product
23
P
Qd
$11
0
TR MR
0
-
24
Results of Price
Discrimination
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
25
Results of Price
Discrimination
$10
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
19
10
9
$10 $9
26
Results of Price
Discrimination
$10
$10 $9
$10 $9
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
19
27
10
9
8
$8
27
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
19
27
34
10
9
8
7
$7
28
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
$7
$10 $9
$8
$7
$6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
29
P
Qd
$10 $9
$11 0
$10 1
$9
2
$8
3
WHEN PRICE
$7
4
$8
DISCIMINATING
$6
5
$8 $7 MR = D$5 6
$4
7
$8 $7 $6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
$10
$10 $9
$10 $9
$10 $9
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
30
Regular Monopoly vs.
Price Discriminating Monopoly
P
MC
Pm
ATC
D
MR
Qm
Q
31
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
P
MC
ATC
D
MR
Q
32
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Qnm
Q
33
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Price Discrimination results in several
prices, more profit, no CS, and a higher
socially optimal
quantity
Q
Q
nm
34
Can You Do The Following?
1.Draw a monopoly making a profit at
long-run equilibrium and identify
price, quantity, and profit.
2. Draw a perfectly competitive
industry AND firm at long-run
equilibrium
3. Draw a price discriminating
monopoly at equilibrium and label
price, quantity, MR, and profit
35