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Monopoly

Economic. Monopoly. Group E Class T02 Group Members: Chow Tze Kit Chung King Wang Fong Suet Man Chan Hoi Yan Kwan Hei Ting (52235056). Flow. Introduction Monopoly (Q1a) Price decision (Q8a,Q8b) Monopoly VS Competition(D curve) Profit Maximization The efficiency of monopoly

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Monopoly

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  1. Economic Monopoly Group E Class T02 Group Members: Chow Tze Kit Chung King Wang Fong Suet Man Chan Hoi Yan Kwan Hei Ting (52235056)

  2. Flow • Introduction • Monopoly (Q1a) • Price decision (Q8a,Q8b) • Monopoly VS Competition(D curve) • Profit Maximization • The efficiency of monopoly • Price discrimination • Summary (Q13) Q8d,Q8e,Q8c,Q8f,Q1b, Q1c,Q2a,Q2b,Q9a,Q9b, Q9c

  3. Introduction

  4. Monopoly

  5. Monopoly • Three resources

  6. Monopoly • For many years, AT&T was a regulated monopoly, providing both local and long- distance telephone service. • Q1a) Explain why long- distance phone service was originally a natural monopoly.

  7. Price Decision

  8. Price Decision • Total Revenue (TR) = Price(P) × Quantity(Q) • Total Cost(TC) = Fixed Cost(FC) + Variable Cost(VC) • Marginal Cost (MC) = △ TC / △ Q • Marginal Revenue (MR) = △ TR / △ Q • Profit = TR － TC • Profit Maximization : MR = MC

  9. Price Decision Q8a) A publisher faces the following demand schedule for the next novel of one of its popular authors: • Compute total revenue, total cost, and profitat each quantity. • Whatquantity would a profit-maximizing • publisher choose? • - What price would it charge?

  10. Price Decision Ans.8a)

  11. Price Decision Q8b) • Compute marginal revenue • (Recall that MR=△TR/△Q) • -How does marginal revenue compare to the price? Explain.

  12. Price Decision Ans.8b) Relationship between P and MR (adj) At starting point: P = MR When Q ↑ (200300),↓ MR($70$50) > ↓ P($80$70) ∵ ↓ P of previous quantity

  13. Monopoly VS Competition (D curve) Profit Maximization Efficiency of monopoly

  14. Monopoly VS Competition(D curve) • A monopoly: △P / △Q , holding other thing being constant • Two effects on TR when ↑ Q : • 1. Output effect: ↑ Q  ↑ TR • 2. Price effect: ↓ P  ↓ TR • ＊ sell a larger Q must ↓ P on all units it sells • ∴ MR<P • A competitive firm: takes P as given by market conditions • no Price effect • ＊sell a larger Q  X affecting the market price • ∴ MR=P

  15. P P D MR Q Q Monopoly VS Competition(D curve) • A monopoly’ s demand curve = the market demand curve • Demand curve slopes downward • Sells product with many perfect substitutes • A competitive firm’ s demand curve: perfectly elastic • The competitive market’ s demand curve slopes downward 0 A competitive firm D=MR 0

  16. MC MC P A monopoly D P ATC MR ATC Q Q 0 P > MR = MC Q Profit Maximization • Rational people think at the margin • Like a competitive firm, a monopolists profit maximizing quantity is at which MR=MC • Uses D curve to find the highest P consumers are willing to pay for that Q P profit A competitive firm P ATC ATC 0 Q P = MR = MC

  17. The efficiency of monopoly • Total surplus (T.S) = Consumer surplus – Producer surplus • Consumer surplus (C.S) = value to buyers – amount paid by buyers • Producer surplus (P.S) = amount received by sellers – cost to sellers → Total surplus = value to buyers – cost to sellers

  18. D The efficiency of monopoly Efficiency: • the property of a resource allocation of maximizing the total surplus received by all members of society • Raising or lowering the quantity of a good would not increase total surplus • The market equilibrium maximizes the total surplus →efficiency P S CS Pe PS Q

  19. MC P Pc= MCc D=MR QC MC PM Q MC M D MR Q QM The efficiency of monopoly • In a competitive market equilibrium: P=MC √ Maximization of total surplus √ efficiency • At the monopoly’s desired output: P>MC ∴ Not all consumers who value the good at more than its cost buy it • Profit-maximizing monopolist produces less than the socially efficient Q √ inefficiency √ deadweight loss (= the total surplus lost) Producer surplus Consumer surplus Deadweight loss P

  20. Q8c) • Graph the MR, MC and demand curves. • At what quantity do the MR and MC curves cross? • What does this signify? Ans.8c) - MR and MC curves cross between quantities of 400,000 and 500,000 - the firm maximizes profits in that region Price $100 MC D Quantity 400 500 1000

  21. Q8d) In your graph, shade in the deadweight loss. Explain in words what this signify? Ans.8d) • DWL = total surplus lost • the monopolist produces less than the socially efficient level of output. Price Deadweight Loss $100 MC D Quantity 400 500 1000

  22. If the author were paid $3million instead of $2 million Ans.8f) • $3 million instead of $2 million • Price no change • no change in MC or MR • - Affect the Profit, it will fall

  23. 8e) • $3 million instead of $2 million • Price no change • no change in MC or MR • - Affect the Profit, it will fall 8f) Price • P = MC • Total surplus maximize • Economic efficiency • Negative Profit $100 MC D Quantity 400 500 1000 MR

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