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November 7, 2013

Pure Competition Quiz Review Begin Chapter 10: Pure Monopoly. November 7, 2013. D C A B C A A B B A D B A B D. Pure Competition Quiz Solutions. Graphing #1. Graphing #2. Graphing #3. P. P. 0. 0. q. Q3. Q2. Q. Q. Single Firm. Industry. S 1. MC. P1 P2 P3. P1 P2

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November 7, 2013

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  1. Pure Competition Quiz Review • Begin Chapter 10: Pure Monopoly November 7, 2013

  2. D • C • A • B • C • A • A • B • B • A • D • B • A • B • D Pure Competition Quiz Solutions

  3. Graphing #1

  4. Graphing #2

  5. Graphing #3

  6. P P 0 0 q Q3 Q2 Q Q Single Firm Industry S1 MC P1 P2 P3 P1 P2 P3 ATC S2 MR D2 D1 Graphing #4 Q 9-6 LO3

  7. P P 0 0 q Q3 Q2 Q1 Q1 Q Single Firm Industry S2 MC P1 P2 P3 P1 P2 P3 ATC S1 MR D1 D3 Graphing #5 9-7 LO3

  8. Chapter 10: Pure Monopoly

  9. Single seller – a sole producer • No close substitutes – unique product • Price maker – control over price • Blocked entry – strong barriers to entry block potential competition (economic, legal, etc.) • Non-price competition – PR or advertising the product Pure Monopoly 10-9

  10. Barrier to Entry: factor that keeps firms from entering an industry. • Economies of Scale (Declining ATC at greater quantities of production) • Pure monopolist can sell at lower price than competition and still earn profit while meeting consumer demand! • Legal Barriers: Patents (20 years) and Licenses (taxicabs, FCC, etc.) • Ownership of Essential Resources • Pricing (create an entry barrier by reducing price, extra advertising, etc.) Barriers to Entry 10-10 LO1

  11. Average total cost 0 Quantity Declining ATC at greater quantities of production $20 15 ATC 10 Economies of Scale 50 200 100 10-11 LO1

  12. Firm’s demand curve is the market demand curve (down-sloping) • MR <P • Thepure monopolist can only increase sales by charging a lower price • THE LOWER PRICE OF THE EXTRA UNIT OF OUTPUT ALSO APPLIES TO ALL PRIOR UNITS OF OUTPUT. • THEREFORE TOTAL REVENUE INCREASES AT A DIMINISHING RATE Monopoly Demand 10-12 LO1

  13. Pure Monopoly Intro Video (more helpful videos on class website) • Continue Ch. 10 Notes • Return Work • HW: Read Chapter 10 & Complete both Monopoly Practice Q’s from handout. ***Chapter 10 Quiz: Thurs. November 14*** November 8, 2013

  14. Because market demand slopes downward, in order for a monopolist to increase sales it must lower its price. So Marginal revenue is less than price for every level of output after the 1st. Pure Competition Pure Monopoly Price Price firm’s demand Market Demand P Demand in Pure Monopoly Quantity Quantity

  15. Monopoly Marginal Revenue Example: An increase in production from 2 to 3 units causes price to fall from $46 to $44. Total revenue rises from $92 to $132. For the third unit, marginal revenue = $___, < Price = $44.

  16. To determine P-Q combination that will maximize profit, cost data is needed. • A monopolist will use the MR = MC Rule in order to maximize profit, but this determines the profit maximizing output, Qm. • Price is determined by the market demand curve. • A vertical line is drawn from Qm to the demand curve. • Pm is the profit-maximizing price. Output and Price Determination

  17. Price MC Pm Cost data will determine a monopolist’s profit. MC = MR Market Demand Finding Pm and Qm Qm MR Quantity of output

  18. Price Profit per unit MC Pm Economic Profit ATC D A Profitable Monopolist Qm MR Quantity of output

  19. Quick Recap: Monopoly Characteristics and Barriers to Entry • Continue Chapter 10… • You need a calculator and graph paper today. • Chapter 10 Multiple Choice Practice Quiz Q’s (solutions on class website) Review Session: Tomorrow 2-3 Chapter 10 Quiz: Thursday (READ IT!) Helpful Monopoly Videos on Class Website November 12, 2013

  20. Fill in the 4 blank columns 10-20 LO1

  21. Monopoly Demand 10-21 LO1

  22. Graph the following curves: • Demand (D) • Marginal Revenue (MR) • Marginal Cost (MC) • Average Total Cost (ATC) • Label Quantity and draw vertical line through all curves (Qm) (Use MR=MC rule) • Label Price (Pm) (where vertical Q line intersects Demand curve) • Label Economic Profit per unit and shade in total economic profit. • What is economic profit per unit? • What is total economic profit? Monopoly Graphing Practice & Review…

  23. $200 175 150 125 Price, Costs, and Revenue 100 75 50 25 1 2 3 4 5 6 7 8 9 10 Quantity Pm=$122 MC Economic Profit ATC D A=$94 MR=MC Output and Price Determination MR 0 10-23 LO2

  24. $200 150 Price 100 50 0 2 2 4 4 6 6 8 8 10 10 12 12 14 14 16 16 18 18 $750 500 Total Revenue 250 0 Demand and Marginal-Revenue Curves Elastic Inelastic Pure monopolist sets prices in the elastic region of the demand curve. (Remember TR Test? Elastic = P up, TR up!!!) D MR Total-Revenue Curve Output and Price Determination TR 10-24 LO2

  25. Price, Costs, and Revenue Quantity MC ATC A Loss Pm AVC V D MR=MC MR Monopoly LossesLower Demand? Higher Costs? 0 Qm 10-25 LO2

  26. Pure competition is most efficient for society. • Monopoly is most inefficient for society, most efficient for producer. S=MC MC b Pm P=MC= Minimum ATC d c Pc Pc a D D MR Qc Qm Qc Economic Effects of Monopoly (a) Purely Competitive Market (b) Pure Monopoly 10-26 LO3

  27. Price discrimination • Charging different buyers different prices to increase profit. • Conditions for success: • Monopoly power • Market segregation (different consumers with different price elasticities) • No resale Price Discrimination 10-27 LO4

  28. Business travel (business travelers = inelastic; vacationers = elastic) • Electric utilities (electricity for light= inelastic; for heating = elastic) • Movie theaters • Golf courses • Coupons (elastic consumers) • International trade Some examples of Price Discrimination 10-28 LO4

  29. Assume ATC is constant, so MC=ATC at all output levels P P Economic profit Economic profit Pb Ps MC = ATC MC = ATC Qs Ds Qb Db MRs MRb Graphical Analysis of Price Discrimination (b) Students (a) Small businesses 10-29 LO4

  30. Natural monopolies (industry in which it is most beneficial to society to have only one firm) HAVE TRADITIONALLY BEEN SUBJECT TO GOVERNMENT REGULATION • But How to regulate? • Socially optimal price • P=MC • Fair return price • P= ATC Regulated Monopoly 10-30 LO5

  31. Price and Costs (Dollars) 0 Quantity Monopoly Price Pm Fair-Return Price – Monopoly Breaks even, DWL still Socially Optimal Price is where Demand=MC, but loss to Monopoly a f Pf ATC Pr r MC D Regulated Monopoly MR b Qm Qf Qr 10-31 LO5

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