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Pure Monopoly

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  1. Pure Monopoly Pure Monopoly Pure Competition Market Structure Continuum SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE Microeconomics, Chapter 9

  2. In this chapter you will learn 9.1 The conditions required for pure monopoly to arise 9.2 About the profit-maximizing price and output in pure monopoly 9.3 About the economic effects of monopoly 9.4 Why a monopolist prefers to charge different prices in different markets 9.5 The choices facing governments that regulate monopolies 9.6 About the deadweight loss associated with monopoly Microeconomics, Chapter 9

  3. Chapter 9 Topics 9.1 Characteristics of Pure Monopoly 9.2 Output & Price Determination in a Monopoly 9.3 Economic Effects of Monopoly 9.4 Price Discrimination & Monopoly 9.5 Regulated Monopoly 9.6 Monopoly & Deadweight Loss Microeconomics, Chapter 9

  4. Pure Monopoly Characteristics: • Single seller • No close substitutes • Price-maker • Blocked entry Microeconomics, Chapter 9

  5. Pure Monopoly • Examples • public utilities Microeconomics, Chapter 9

  6. Pure Monopoly • Examples • public utilities • professional sports teams Microeconomics, Chapter 9

  7. Barriers to Entry • Economies of Scale • e.g., natural monopoly illustrated… Microeconomics, Chapter 9

  8. Economies of Scale D Figure 9-1 $20 15 ATC 10 If ATC declines over the entire market demand, least-cost production is realized only if there is one producer - a natural monopoly 0 50 100 200 Quantity (millions) Microeconomics, Chapter 9

  9. Barriers to Entry • Economies of Scale • Legal Barriers to Entry: Patents & Licenses • Ownership or Control of Essential Resources • Pricing & Other Strategic Barriers to Entry Microeconomics, Chapter 9

  10. Monopoly Demand Three basic assumptions: • Monopoly status is secured • Firm is not governmentally regulated • Firm charges the same price for all units Microeconomics, Chapter 9

  11. Monopoly Demand • Marginal revenue is less than price illustrated… Microeconomics, Chapter 9

  12. Table 9-1 Microeconomics, Chapter 9

  13. Table 9-1 Microeconomics, Chapter 9

  14. Table 9-1 ] Microeconomics, Chapter 9

  15. Table 9-1 ] ] Microeconomics, Chapter 9

  16. Table 9-1 ] ] ] Notice that MR < p ] ] ] ] ] ] ] Microeconomics, Chapter 9

  17. 132 Gain = $132 Figure 9-2 P When price decreases from $142 to $132, one more unit is sold…. revenue will increase by $132 with the extra unit sold $142 D Q 1 2 3 4 5 6 Microeconomics, Chapter 9

  18. Figure 9-2 P When price decreases from $142 to $132, one more unit is sold…. but revenue loss = $10 X 3 units $142 Loss = $30 132 D Marginal revenue = $132-30 = $102 < $132 (price) Gain = $132 Q 1 2 3 4 5 6 Microeconomics, Chapter 9

  19. Monopoly Demand • Marginal revenue is less than price • The monopolist is a price-maker Microeconomics, Chapter 9

  20. Monopoly Demand • Marginal revenue is less than price • The monopolist is a price-maker • The monopolist sets prices in the elastic region of demand illustrated… Microeconomics, Chapter 9

  21. Figure 9-3 Elastic 200 150 200 50 Dollars Inelastic MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 500 250 TR Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Microeconomics, Chapter 9

  22. Figure 9-3 Elastic 200 150 200 50 Dollars Inelastic MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 500 250 TR Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Microeconomics, Chapter 9

  23. Chapter 9 Topics 9.1 Characteristics of Pure Monopoly 9.2 Output & Price Determination in a Monopoly 9.3 Economic Effects of Monopoly 9.4 Price Discrimination & Monopoly 9.5 Regulated Monopoly 9.6 Monopoly & Deadweight Loss  Microeconomics, Chapter 9

  24. Output & Price Determination • Cost Data • assume competitive resource markets • MR=MC Rule illustrated… Microeconomics, Chapter 9

  25. Table 9-1 produce? ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Microeconomics, Chapter 9

  26. Table 9-1 produce? ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Microeconomics, Chapter 9

  27. Table 9-1 produce? ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Microeconomics, Chapter 9

  28. Table 9-1 produce? ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Microeconomics, Chapter 9

  29. Table 9-1 produce? ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Microeconomics, Chapter 9

  30. Table 9-1 produce? ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Microeconomics, Chapter 9

  31. Table 9-1 stop here ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Don’t produce beyond the 5th unit ] ] Microeconomics, Chapter 9

  32. Table 9-1 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Same result when we compare TC & TR ] ] Microeconomics, Chapter 9

  33. P 200 175 150 125 100 75 50 25 D MR Q 0 1 2 3 4 5 6 7 8 9 10 Figure 9-4 Microeconomics, Chapter 9

  34. P 200 175 150 125 100 75 50 25 D MR = MC MR Q 0 1 2 3 4 5 6 7 8 9 10 Figure 9-4 find q MC Microeconomics, Chapter 9

  35. P 200 175 150 125 100 75 50 25 D MR Q 0 1 2 3 4 5 6 7 8 9 10 Figure 9-4 find p MC monopolist is “price-maker” $122= p Microeconomics, Chapter 9

  36. P 200 175 150 125 100 75 50 25 D MR Q 0 1 2 3 4 5 6 7 8 9 10 Figure 9-4 find ATC MC $122= p ATC Microeconomics, Chapter 9

  37. P 200 175 150 125 100 75 50 25 D MR Q 0 1 2 3 4 5 6 7 8 9 10 Figure 9-4 MC $122= p ATC $94=ATC Microeconomics, Chapter 9

  38. P 200 175 150 125 100 75 50 25 D MR Q 0 1 2 3 4 5 6 7 8 9 10 Figure 9-4 profit =(p - ATC) X q =(122-94) X 5 =140 MC $122= p ATC Profit $94=ATC Microeconomics, Chapter 9

  39. Output & Price Determination • Cost Data • assume competitive resource markets • MR=MC Rule • No Monopoly Supply Curve illustrated… Microeconomics, Chapter 9

  40. No Monopoly Supply Curve p1 D MR q1 q1 supplied at p1 p MC q Microeconomics, Chapter 9

  41. No Monopoly Supply Curve q1 supplied at p2 under different D conditions p MC p2 p1 D MR q q1 Microeconomics, Chapter 9

  42. No Monopoly Supply Curve p no unique p-q combination NO SUPPLY CURVE MC p2 p1 D MR q q1 Microeconomics, Chapter 9

  43. Output & Price Determination • Misconceptions Concerning Monopoly Pricing • Not the highest price • Total, not unit, profit • Possibility of Losses by Monopolist illustrated… Microeconomics, Chapter 9

  44. Loss MR = MC Figure 9-5 P MC A ATC Pm AVC D V MR Q Qm Microeconomics, Chapter 9

  45. Chapter 9 Topics 9.1 Characteristics of Pure Monopoly 9.2 Output & Price Determination in a Monopoly 9.3 Economic Effects of Monopoly 9.4 Price Discrimination & Monopoly 9.5 Regulated Monopoly 9.6 Monopoly & Deadweight Loss   Microeconomics, Chapter 9

  46. Economic Effects of Monopoly • Price, Output & Efficiency • inefficient relative to a purely competitive industry • Pm > MC • Pm > minimum ATC illustrated… Microeconomics, Chapter 9

  47. Pc p=MC=minimum ATC Qc Figure 9-6 P S = MC Price & output if the industry were competitive D Q Microeconomics, Chapter 9

  48. Pm Pc Qm Qc Figure 9-6 P S = MC Monopolist will sell fewer units at a higher price than in pure competition D MR Q Microeconomics, Chapter 9

  49. Economic Effects of Monopoly • Income Transfer • monopoly owners enriched at the expense of consumers Microeconomics, Chapter 9

  50. Economic Effects of Monopoly • Cost Complications • economies of scale • simultaneous consumption • network effects • X-inefficiency illustrated… Microeconomics, Chapter 9