ECONOMICS 200 PRINCIPLES OF MICROECONOMICS

ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

Monopoly • A single seller in a market  Rare Monopolist Demand Curve D 0 Q

Monopoly Monopolist diagram MR D = AR = P 0 Q Marginal revenue lies below demand for the monopolist.

Monopoly Example:

Monopoly Monopolist  - Maximizing Diagram P MC ATC C P0 A B D MR Q 0 Q0

P MC ATC C P0 A B D MR Q 0 Q0 Monopoly Monopolist  - Maximization NOTE: Always set price from the demand curve.  = TR – TC = OPoCQo– OABQo = APoCB  will last to long run because there is no entry by competitors.

ATC P MC C A B P0 D MR Q 0 Q0 Monopoly Monopolist Could Also Make A Loss  = TR – TC = OPoBQo– OACQo = PoACB(shaded area)  A LOSS

Special Case of Monopoly Discriminating Monopoly or Price Discrimination charging different prices to different customers for the same commodity. Necessary Condition: (1) Must have some monopoly power (2) Must face at least two different demands (3) Must be able to keep the two demand separate.

P PO D Q QO Reminder Consumer Surplus is measured as the area above the price line and under the demand curve. Consumer Surplus

Special Case of Monopoly Discriminating Monopoly or Price Discrimination Result: Take away some consumer surplus. Consumer surplus is difference between what a consumer actually pays for a commodity and what she/he would be willing to pay: A B Q1 sells at P1 ; Q0 – Q1 sells at P0 . P0P1AB is no longer consumer surplus, but rather is now part of total revenue for firm.

Special Case of Monopoly Perfect Price Discrimination Price will follow the Demand Curve. OUTCOME: Completely Eliminate Consumer Surplus.

Special Case of Monopoly Market Structure Spectrum Degree of Competition Oligopoly Monopoly Perfect Competition Monopolistic Competition Concentration Ratio is a measure of market power: is the the fraction of total market sales controlled by the industry’s largest firms. — 4 - firm concentration ratio — 8 - firm concentration ratio

Monopolistic Competition Characteristics: 1. Lots of firms 2. Free entry and exit 3. Product differentiation D 0 Q

P2 P2 D P1 D P1 D Q Q Q 0 0 Q2 Q1 0 Q2 Q1 Monopoly Perfect Competition Monopolistic Competition Monopolistic Competition The steepness of demand depends on the number of close substitutes.

Monopolistic Competition Profit-Maximizing in Monopolistic Competition in Short Run P MC SRATC A P C B D MR Q 0 Q  = CPAB

Monopolistic Competition Profit-Maximizing in Monopolistic Competition in Long Run P MC LRATC A P D MR Q 0 Q  = TR – TC = OPAQ – OPAQ = 0

Oligopoly Term is Greek for “few sellers” — Is a type of industry where a few large firms account for the majority of sales. — Their products are usually differentiated, but there are close substitutes. — Most of the big brand name items that you are aware of are produced under oligopolistic conditions. — There can be small sellers in these markets also, but the very large ones account for the vast majority of sales.

Oligopoly Continued —These firms are not price-takers, they are price-setters. —They know that their competitions will react to what they do. So there is strategic behavior. —Collusion is illegal, but frequently there is “tacit collusion”.

Oligopoly Profit-Maximizing Diagram for Oligopoly P MC ATC B P0 A C D MR Q 0 Q0 These profit can persist to the long-run because of barriers to entry.  = CP0AB P > MC

Barriers to Entry 1. Cost Advantage 2. Predatory Pricing 3. Advertising - Creating Brand Loyalties 4. Product Proliferation 5. Government Barriers – Licensing, etc.

THANK YOU! HAVE A NICE DAY.

ECONOMICS 200 PRINCIPLES OF MICROECONOMICS