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Chapter 8 Monopoly

Chapter 8 Monopoly. Lecture Slides. Survey of Economics Irvin B. Tucker. What will I learn in this chapter?. How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss. What is a monopoly?. A market structure characterized by:.

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Chapter 8 Monopoly

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  1. Chapter8Monopoly Lecture Slides Survey of EconomicsIrvin B. Tucker

  2. What will I learn in this chapter? • How a monopolist determines what price to charge and how much to produce to maximize profit or minimize loss

  3. What is a monopoly? A market structure characterized by: 1. Single seller 2. Unique product 3. Impossible entry into the market

  4. What does it mean to have a unique product? • There are no close substitutes for the monopolist’s product

  5. What are some examples of impossible entry? • Owner of a vital resource • Legal barriers • Economies of scale

  6. What are major barriers that prevent new firms from entering and competing with a monopolist? • Ownership of a Vital Resource • Legal Barriers • Economies of Scale

  7. What is the advantage of economies of scale? • Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms

  8. What is anatural monopoly? • An industry in which the long-run average cost of production declines throughout the entire market

  9. What is unique about a natural monopoly? • A single firm will produce output at a lower per-unit cost than two or more firms in the industry

  10. Exhibit 8.1 Minimizing Costs in a Natural Monopoly 5 firms 40 35 2 firms 30 25 1 firm Cost per Unit (dollars) 20 15 LRAC 10 5 0 50 60 90 80 70 30 10 20 40 100 110 120 Quantity of Output 10

  11. What is a price maker? • A firm that faces a downward-sloping demand curve • As a result, a monopolist can choose its price along the demand curve.

  12. What is the difference between monopoly and perfect competition? • The D and MR curves of the monopolist are downward sloping; in perfect competition they are equal and horizontal

  13. What is unique about the demand curve for a monopolist? • The monopolist demand curve and the industry demand curve are one in the same

  14. Why is MR < P for all but the firstunit of output? • Observe the relationship between P and MR in Exhibit 8.2. • To sell 1 unit, P=$138 and TR=$138. • To sell 2 units, P=$125 and TR=$250. • Compute that TR increases $112 ($250-$125), which means MR=$112. • Notice that at 2 units P=$125>$112 and this gap widens as the units increase.

  15. Exhibit 8.2 Demand, Marginal Revenue, and Total Revenue for Computech as a Monopolist

  16. Exhibit 8.2(a) Monopolist 150 100 50 Demand Price & Marginal Revenue (dollars) 0 8 4 12 2 10 14 6 -50 -100 -150 8 Marginal revenue -200 Quantity of Output (units per hour)

  17. Exhibit 8.2(b) Total Revenue Curve 400 300 Total Revenue (dollars) 200 100 Total Revenue 0 2 4 6 8 10 12 14 16 18 Quantity of Output (units per hour)

  18. What two methods does a monopolist use to maximize profit or minimize losses? • Total revenue method • MR = MC method

  19. 8.3

  20. Exhibit 8.4 Short-Run Profit Maximization for a Monopolist Using the Total Revenue - Total Cost Method

  21. Exhibit 8.5 Short-Run Profit Maximization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method

  22. Exhibit 8.6 Short-Run Loss Minimization for a Monopolist Using the Marginal Revenue Equals Marginal Cost Method

  23. Can a monopolist make a profit in the long-run? • If the positions of a monopolist’s demand and cost curves give it a profit and nothing changes these curves, it can make a profit in the long-run

  24. What isprice discrimination? • The practice of a seller charging different prices for the same product not justified by cost differences

  25. What is arbitrage? • The practice of earning a profit by buying a good at a low price and reselling the good at a higher price

  26. Exhibit 8.7 Price Discrimination

  27. Is pricediscrimination unfair? • At the lower price, many buyers benefit from the discrimination by not being excluded from purchasing the product if a higher price were charged.

  28. Is perfectcompetition efficient? • A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.

  29. Is monopoly efficient? • A monopolist is inefficient because it sets P>MR=MC and resources are underallocated to the production of its product

  30. Exhibit 8.8 Comparing a Perfectly Competitive Firm and a Monopolist

  31. How does monopoly harm consumers? • It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation

  32. Exhibit 8.9 Impact of Monopolizing an Industry S=MC Price, Costs, and Revenue(dollars) Pm Pc D MR MR=MC Qm Qc Quantity of Output

  33. What is the case against monopoly? • Higher price • Charges a Price > MC • Long-run economic profit • Alters the distribution of income to favor monopolist

  34. END

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