Monopoly †economics Essay

In this chapter, look for the answers to these questions ? Why do monopolies near? ? Why is MR P for a monopolizer? ? How do monopolies choose their P and Q? ? How do monopolies affect corporations well-being? ? What can the government do about monopolies? ? What is legal injury difference? Economics PRINCIPLES OF N. Gregory Mankiw agiotage PowerPoint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved 1 Introduction ? A monopoly is a substantial that is the sole seller of a product without close substitutes. Why Monopolies Arise.The main cause of monopolies is barriers to entry new(prenominal) squiffys cannot enter the commercialise. Three sources of barriers to entry 1. A single firm owns a key resource. E. g. , DeBeers owns most of the originations diamond mines 2. The govt gives a single firm the exclusive right to produce the good. E. g. , patents, copyright laws 2 ? In this chapter, we study monopoly and contrast it with perf ect competition. ? The key difference A monopoly firm has merchandise power, the business leader to influence the merchandise price of the product it sells. A competitive firm has no market power.MONOPOLY MONOPOLY 3 Why Monopolies Arise3. Natural monopoly a single firm can produce the entire market Q at lower cost than could several firms. Example 1000 homes need electricity ATC is lower if genius firm services all 1000 homes than if two firms distributively service 500 homes. MONOPOLY Monopoly vs. Competition conduct Curves In a competitive market, the market withdraw crimp slopes downward. But the demand curve for some(prenominal) individual firms product is horizontal at the market price. The firm can outgrowth Q without lowering P, so MR = P for the competitive firm.4 Cost Electricity ATC slopes downward due to abundant FC and small MC ATC 500 1000 Q P A competitive firms demand curve $80 $50 D Q 5 MONOPOLY 1 10/23/2012 Monopoly vs. Competition affect Curves A monopo list is the only seller, so it faces the market demand curve. To sell a larger Q, the firm must write out P. Thus, MR ? P. P ACTIVE LEARNING A monopolys revenue Common thou is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. Q 0 1 2 3 4 5 6 P $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 7 1 TR AR n. a. MR A monopolists demand curve D Q MONOPOLY 6 What is the relation between P and AR?Between P and MR? ACTIVE LEARNING Answers Here, P = AR, same as for a competitive firm. Here, MR P, whereas MR = P for a competitive firm. Q 0 1 2 3 4 5 6 1 Common Grounds D and MR Curves P TR $0 4 7 9 10 10 9 AR n. a. $4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 8 MR $4 3 2 1 0 1 Q P MR $4 3 2 1 0 1 $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 0 $4. 50 1 2 3 4 5 6 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 P, MR $5 4 3 2 1 0 -1 -2 -3 0 1 2 3 take on curve (P) MR 4 5 6 7 Q 9 MONOPOLY Understanding the Monopolists MR ? increase Q has two effects on revenue ? Output effect higher output raises revenue ? equipment casualty effect lower price reduces revenue ? To sell a larger Q, the monopolist must reduce the price on all the units it sells. Profit-Maximization ? Like a competitive firm, a monopolist maximizes profit by producing the sum where MR = MC. ? Once the monopolist identifies this quantity, it sets the highest price consumers are willing to pay for that quantity. ? Hence, MR P ? MR could even be negative if the price effect exceeds the output effect (e. g. , when Common Grounds increases Q from 5 to 6). 10 ? It finds this price from the D curve. MONOPOLY MONOPOLY 11 2 10/23/2012 Profit-Maximization1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Q Costs and Revenue MC The Monopolists Profit Costs and Revenue MC ATC P D MR Quantity As with a competitive firm, the monopolists profit equals (P ATC) x Q P ATC D MR Q Quantity Profit-maximizing output MONOPOLY 12 MONOPOLY 13 A Monopoly Does Not Have an S Curve A competitive firm ? takes P as given ? has a fork up curve that shows how its Q depends on P. A monopoly firm ? is a price-maker, not a price-taker ? Q does not depend on P rather, Q and P are jointly determined by MC, MR, and the demand curve.So there is no supply curve for monopoly. MONOPOLY 14 CASE STUDY Monopoly vs. Generic Drugs Patents on new drugs give a fugacious monopoly to the seller. Price The market for a typical drug PM When the patent expires, PC = MC the market becomes competitive, generics appear. QM D MR Quantity QC MONOPOLY 15 The Welfare Cost of Monopoly ? Recall In a competitive market equilibrium, P = MC and total surplus is maximized. The Welfare Cost of Monopoly Competitive eqm quantity = QC P = MC total surplus is maximized Monopoly eqm quantity = QM P MC deadweight issue Price Deadweight MC loss?In the monopoly eqm, P MR = MC ? The value to buyers of an additive unit (P) exceeds the cost of the resources needed t o produce that unit (MC). ? The monopoly Q is too low could increase total surplus with a larger Q. ? Thus, monopoly results in a deadweight loss. P P = MC MC D MR QM QC Quantity MONOPOLY 16 MONOPOLY 17 3 10/23/2012 Price Discrimination ? Discrimination treating great deal differently found on some characteristic, e. g. race or gender. ideal Price Discrimination vs. Single Price Monopoly Here, the monopolist charges the same price (PM) to all buyers. A deadweight loss results.Price Consumer surplus Deadweight loss ? Price unlikeness selling the same good at different prices to different buyers. PM MC ? The characteristic use in price discrimination is willingness to pay (WTP) ? A firm can increase profit by charging a higher price to buyers with higher WTP. Monopoly profit D MR QM MONOPOLY 18 Quantity 19 MONOPOLY Perfect Price Discrimination vs. Single Price Monopoly Here, the monopolist produces the competitive quantity, but charges each buyer his or her WTP. This is called pe rfect price discrimination. The monopolist captures all CS as profit.But theres no DWL. MONOPOLY Price Discrimination in the Real World ? In the authentic world, perfect price discrimination is not possible ? No firm knows every buyers WTP ? Buyers do not promise it to sellers Price Monopoly profit ? So, firms divide customers into groups MC D MR Quantity based on some discernable trait that is likely related to WTP, such as age. Q 20 MONOPOLY 21 Examples of Price Discrimination flick tickets Discounts for seniors, students, and people who can attend during weekday afternoons. They are all more likely to give lower WTP than people who pay full price on Friday night.Airline prices Discounts for Saturday-night stayovers help distinguish business travelers, who usually have higher WTP, from more price-sensitive leisure travelers. MONOPOLY 22 Examples of Price Discrimination Discount coupons People who have sequence to clip and organize coupons are more likely to have lower incom e and lower WTP than others. Need-based financial forethought Low income families have lower WTP for their childrens college education. Schools price-discriminate by offering need-based aid to low income families. MONOPOLY 23 4 10/23/2012 Examples of Price DiscriminationQuantity discounts A buyers WTP often declines with additional units, so firms charge less(prenominal) per unit for large quantities than small ones. Example A movie orbit charges $4 for a small popcorn and $5 for a large one thats in two ways as big. Public policy Toward Monopolies ? Increasing competition with antitrust laws ? Ban some anticompetitive confides, allow govt to fail up monopolies. ? E. g. , Sherman Antitrust Act (1890), Clayton Act (1914) ?Regulation ? Govt agencies set the monopolists price. ? For natural monopolies, MC ATC at all Q, so bare(a) cost pricing would result in losses. ? If so, regulators might subsidise the monopolist or set P = ATC for zero economic profit. MONOPOLY 24 MONOPOLY 25 Public Policy Toward Monopolies ?Public ownership ? Example U. S. Postal Service ? Problem Public ownership is usually less efficient since no profit motive to minimize costs CONCLUSION The Prevalence of Monopoly ? Doing nothing ? The forward policies all have drawbacks, so the best policy may be no policy. ? In the real world, pure monopoly is rare. ? Yet, many firms have market power, due to ? selling a unique variety of a product ? having a large market share and few significant competitors ?In many such cases, most of the results from this chapter apply, including ? markup of price over marginal cost ? deadweight loss MONOPOLY 26 MONOPOLY 27 CHAPTER SUMMARY ? A monopoly firm is the sole seller in its market. Monopolies arise due to barriers to entry, including government-granted monopolies, the control of a key resource, or economies of scale over the entire range of output. CHAPTER SUMMARY ? Monopoly firms maximize profits by producing the quantity where marginal revenue eq uals marginal cost. But since marginal revenue is less than price, the monopoly price will be greater than marginal cost, leading to a deadweight loss. ?A monopoly firm faces a downward-sloping demand curve for its product. As a result, it must reduce price to sell a larger quantity, which causes marginal revenue to collide with below price. 28 ? Monopoly firms (and others with market power) try to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination. 29 5 10/23/2012 CHAPTER SUMMARY ? Policymakers may respond by rule monopolies, using antitrust laws to promote competition, or by taking over the monopoly and running it. Due to problems with each of these options, the best option may be to take no action. 30 6.