1

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
9
8
7
6
5
Profit =$20
D
16 17 18 19 20
MR
Q
5

Elastic and Inelastic Range
P Elastic Inelastic
Total Revenue Test
If price falls and TR increases then demand is elastic.
$15
10
5
Total Revenue Test
If price falls and
TR falls then demand is inelastic.
TR
$64
40
20
D
MR
Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
A monopoly will only produce in the elastic range
TR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
6

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
P
Where is CS and PS for a monopoly?
S = MC
CS
P m
PS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
MR
D
Q
Q m
9

10

Why would the government regulate an monopoly?
1. To keep prices low
2. To make monopolies efficient
•
Use Price controls: Price Ceilings
• Why don’t taxes work?
• Taxes limit supply and that’s the problem
11

Where should the government place the price ceiling?
P = MC (Allocative Efficiency)
OR
Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
12

Regulating Monopolies
Where does the firm produce if it is
P unregulated?
MC
P m
Q m
MR
ATC
D
Q
13

P
Regulating Monopolies
MC
P m
P so
MR
Q m
Q so
ATC
D
Q
14

P m
P so
P fr
P
Regulating Monopolies
MC
MR
Q m
Q so
Q fr
ATC
D
Q
15

P m
P so
P fr
Regulating Monopolies
Unregulated
P
Socially
Optimal MC
Fair
Return
ATC
D
MR
Q m
Q so
Q fr
Q
16

Regulating a Natural Monopoly
What happens if the government sets a price ceiling to get the socially optimal quantity?
P
The firm would make a loss and would require a subsidy
MC
ATC
P so
MR D
Q socially optimal
Q
17

18

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)
19

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
20

P Qd TR MR
$11 0 0 -
21

$10
Results of Price
Discrimination
P Qd TR MR
$11 0 0 -
$10 1 10 10
22

$10
Results of Price
Discrimination
$10 $9
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
23

$10
Results of Price
Discrimination
$10 $9
$10 $9 $8
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
$8 3 27 8
24

$10
Results of Price
Discrimination
$10 $9
$10 $9 $8
$10 $9 $8 $7
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
$8 3 27 8
$7 4 34 7
25

$10
$10
$10
Results of Price
Discrimination
$9
$9 $8
$10 $9 $8
$10
$10
$9
$9
$8
$8
$7
$7
$7
$6
$6 $5
$10 $9 $8 $7 $6 $5 $4
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 $9
$8 3 27 $8
$7 4 34 $7
$6 5 40 $6
$5 6 45 $5
$4 7 49 $4
26

P Qd TR MR
$11 0 0 -
$10 1 10 10
$10
$9 2 19 $9
$10 $9
$10 $9 $8
$10 $9 $8
$8 3 27 $8
WHEN PRICE
$7 4 34 $7
DISCIMINATING
5 40 $6
$7 MR = D
$5 6 45 $5
$4 7 49 $4
$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5
$10 $9 $8 $7 $6 $5 $4
27

Regular Monopoly vs.
Price Discriminating Monopoly
P
MC
P m
ATC
D
MR
Q m
Q
28

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
P
MC
ATC
D
MR
Q
29

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
Q nm
Q
30

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 nm
Q
31

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
32