monopoly demand curve the industry and the firm are the same the demand curve is downsloping
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Monopoly Demand Curve The industry and the firm are the same The demand curve is downsloping
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Supply Curve
There is no supply curve for a pure monopoly
It is possible for different demand conditions to bring about different prices for the same output
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Marginal Revenue
MR is less than P for a monopoly except for the 1st unit
They can increase sales only by charging a lower price
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0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal Revenue
Marginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
Gain = $132
Loss = $30
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Price Maker
The monopolist sets the price of its product by controlling the supply
They will set prices in the elastic range of demand (TR test---as price declines, TR increases)
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Profit Maximization
MR = MC rule still applies Draw a vertical line up from where MR =
MC to the D curve to find P
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Profit Maximization
0
$200
175
150
125
25
100
75
50Pri
ce, C
ost
s, a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
Quantity
D
MR
ATC
MC
MR=MC
Pm=$122
A=$94
EconomicProfit
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Loss Minimization
0
Pri
ce, C
ost
s, a
nd
Rev
enu
e
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
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Economic Effects of MonopolyPrice, Output, and Efficiency
PurelyCompetitive
Market
PureMonopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure Competition is EfficientMonopoly P is >MC
And Is Inefficient- make too little at too high a cost
a
b
c
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Misconceptions About Monopolies 1. Not highest price- seek maximum
profit, not price. Some high prices would reduce sales and total revenue
2. Seek maximum total profit not unit profit
3. Possibility of loss- monopolies are not immune to escalating resource costs or changing tastes
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X inefficiency When a firm produces output at a level
higher than the lowest possible cost of producing
Reasons: 1. Poorly motivated workers Bad management- looking to expand
their power, nepotism etc***competitive firms avoid x inefficiency
because of competition
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Rent-Seeking Behavior
Any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else’s or even society’s expense- increases costs without making a better product
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Problems with Monopolies 1. Charge higher than competitive prices 2. Stifle innovation 3. Engage in rent-seeking behavior 4. X inefficiency
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Government Actions
1. if the monopoly is obtained through anti-competitive means, the government can apply anti-trust laws
2. Regulate prices 3. Can ignore it if the monopoly appears
short-lived
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Price Discrimination
The practice of selling a specific product at more than one price when the price differences are not justified by cost differences
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3 Types of Price Discrimination 1. Charging each customer in a single
market the maximum price he is willing to pay
2. Charging each customer one price for the first set of units purchased and a lower price for the subsequent units purchased
3. Charging some customers one price and other customers another price
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Conditions for Price Discrimination 1. Monopoly Power 2. Market segregation- separate buyers
into different classes 3. No resale
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Examples of Price Discrimination 1. Golf and movie theatres- different age
and time costs (seniors, weekend)- more expensive on the weekend
2. Airlines charge higher rates on big business travel days
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Figure 8a: Price Discrimination
30
E ATC
80
$120
DMR
MC
(a)
Number of Round-trip Tickets
Dollars per Ticket
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Figure 8b: Price Discrimination
30
Dollars per Ticket
120
DMR
MC
10
$160
Additional profit from price discrimination
Number of Round-trip Tickets
(b)
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Figure 8c: Price Discrimination
Number of Round-trip Tickets
Dollars per Ticket
$120
DMR
MC
30
100
40
FG
H
Additional profit from price discrimination
(c)
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Using the Theory: Price Discrimination at Colleges and Universities Most colleges and universities give some kind of
financial aid to a large proportion of their students Financial aid has been used as an effective
method of price discrimination Designed to increase revenue of the college
Colleges have long been in an especially good position to benefit from price discrimination, because they satisfy all three requirements Face downward-sloping demand curves Able to identify consumers willing to pay more Able to prevent low-price customers from reselling to
high-price customers
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Socially Optimal Price
P = MC Regulated price set as a price ceiling
(maximum cost)
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Fair Return Cost
P = ATC At times the socially acceptable cost
causes the firm to “lose” Governments can subsidize the
difference or allow the firm to charge enough to have “fair returns”
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Regulated Monopoly
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Perfectly Discriminating Monopoly Unregulated Perfectly
Discriminating