AP Microeconomics

AP Microeconomics 12:2 Warm Up: What are the four main market structures? How would you describe the products in each one?

Perfect Competition & Monopoly Compared (1) • Perfectly competitive firms are Price- _______________; which means • And P = MR • Monopoly firms are Price - _____________________; which means • Therefore, P ≠ MR!! • Having power in a market means firms can change price and still make profit! Firms can acquire power in imperfectly competitive markets if they can consistently price their goods in excess of marginal costs. TAKERS No one firm has price control in the market MAKERS The one firm is the only provider; total price control

Perfect Competition & Monopoly Compared (2) • A perfectly competitive firm’s [output] demand curve is • A perfectly competitive firm’s [output] supply curve is • A monopoly firm has NO _________________ curve because they are both the industry and the firm. • A monopoly firm’s ___________________ curve dictates the both the quantity supplied and demanded at each price. the constant MR curve; perfectly elastic the firm’s MC curve at all prices above the min. point on the AVC curve SUPPLY DEMAND

Perfect Competition & Monopoly Compared • (3) The demand curve of firms in both monopolies and perfect competition are • (4) Marginal cost curves and average cost curves are the same shape in both market structures: • (5) The optimal level of production for ALL firms occurs when MR = MC. Negative, and downward sloping Increasing in the short run To find Q (output) always look for

Market Share Measured by the Herfindahl Index This measures the size of firms in relationship to the industry and an indicator of the amount of competition among them 2. Pricing Measured by the Lerner Index Describes a monopoly’s price power L = (P – MC) P The greater the value, the greater the price power. In perfect competition, where P = MC, Lerner index is zero; no market power. Monopoly Power 2 Forms: ways to measure a firm’s power

Monopolies • Monopoly demand curves are downward sloping to the right implying that P>MR and a pricing strategy ensues. • The monopolist determines price and output (optimal or best) at the intersection of MR and MC. • So in order to induce more sales (increasing total revenue) monopolists will lower price (if the product is relatively elastic).

MONOPOLY REVENUES & COSTS

12:3 Identify The Market Structures of the following Products:

MONOPOLY REVENUES & COSTS $200 150 200 50 Dollars Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 500 250 Dollars Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MONOPOLY REVENUES & COSTS Elastic $200 150 200 50 Dollars 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 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MONOPOLY REVENUES & COSTS Elastic Inelastic $200 150 200 50 Dollars 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 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Underneath Graphs: • When the demand for the product is ELASTIC, the monopolist should lower prices to raise TR. • When the demand for the product is INELASTIC, the monopolist should raise prices to raise TR.

How Do Monopolists Determine Profit? Price & Cost Find Where MC = MR to determine quantity The revenue earned from the q.d. determines the profit above ATC At that Quantity is also the quantity demanded and thus price Elastic MC The MR curve should hit the x-axis at the demand curves Mid-Point PX Downward sloping demand curve, whatever is demanded the monopolist will supply ATC Inelastic Profit MR Demand QX Quantity

How do Monopolists Determine Profit? Look For: #1: Where MC = MR (optimal point of production, therefore quantity supplied) #2: That quantities intersection with both the demand curve and ATC curve #3: Price on Demand Curve & Price on ATC curve Monopolists realize profits and set price where MC = MR and P > MR!!!

Contrasts to Perfect Competition • Output is restricted • Price is higher • Output is lower, which leads to: • Misallocation of resources

Reduction of Consumer Surplus {Review of Consumer Surplus: marginal utility is greater than price and people who are willing to pay higher than the market price for a good “save” money} Looks Like: Contrasts to Perfect Competition Consumer Surplus Price S PX Producer Surplus D Quantity

Contrasts to Perfect Competition 6. Monopolists receive a rent {receives more than contributes to production} 7. Accruement of dead-weight loss {wasted resources}

Dead weight loss; monopolists do not have to conserve resources!! They have no competition MC P Consumer Surplus ATC Wasted Resources P1 Price and Costs Profit Costs D MR Q Q1

Therefore, Monopolies are powerful but are likely to show inefficiencies!!! MR = MC Monopolists Price Dilemma of Regulation: Which Price? P Fair-Return Price Normal Profit Only Pm Socially-Optimum Price Price and Costs ATC Pf MC Ps D MR Q Qm Qf Qs

Is there a need for government to regulate this market structure?

No More Laissez Faire!! Govt Gets Involved!

AP Microeconomics