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Welcome to Day 14

Welcome to Day 14. Principles of Microeconomics. What we learned last class. 1) When a firm losing money should shut-down. 2) The firm’s supply curve in the short-run and market equilibrium 3) Entry, Exit, and long-run equilibrium. 4) Increasing, constant, and decreasing cost industries.

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Welcome to Day 14

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  1. Welcome to Day 14 Principles of Microeconomics

  2. What we learned last class.1) When a firm losing money should shut-down.2) The firm’s supply curve in the short-run and market equilibrium3) Entry, Exit, and long-run equilibrium.4) Increasing, constant, and decreasing cost industries.

  3. Goals for Today1) What is a monopoly?2) The Microsoft “monopoly”3) The monopolist’s demand curve4) Why marginal revenue is below price for a monopoly

  4. Chapter 9Monopoly

  5. 3 Properties of Monopoly1) One Seller2) No Close Substitutes3) Extremely High Barriers to Entry

  6. What are the barriers to entry?1) Government Restrictions – Patents2) Economies of Scale – Natural Monopoly3) Restricted Ownership of Raw Material - ALCOA

  7. Monopoly and MicrosoftComputers in the early 1980’s1) Apple II2) Commodore PC3) Atari 400 (48k)4) TRS-805) IBM PC

  8. All had incompatible operating systems

  9. Next Generation – Mid 1980’s1) Early Macs2) Commodore Amiga3) Atari ST4) ---5) IBM 386’s, 486’s

  10. The Amiga and Atari ST are dying of software suffocation.

  11. By the late 1990’s, only the IBM and its clones, and the Mac are left.IBM doesn’t have near monopoly because of the clones, but Microsoft does for Windows

  12. Microsoft starts to use this monopoly of Windows to take over word processing and web browsing

  13. Government Antitrust Suit Against Microsoft (1999)

  14. Bush wins the election of 2000 and the Republican lawyers drop the case in return for Microsoft’s promise not to do it again.

  15. This is a variation of the economies of scale. How can you make a computer/operating system to compete with Microsoft when the software industry is designed to work with Windows? You would have to provide your own software, which would mean starting on a huge scale.

  16. If this is the market demand curve for the monopoly’s product, what is the monopoly firm’s demand curve? Market Firm P P P1 ? P2 D Q1 Q Q2 Q

  17. The firm’s demand curve is the same as the market’s because the firm is the market. Market Firm P P = P1 P1 P2 P2 D Q1 Q1 Q Q2 Q2 Q

  18. What’s the relationship between price and marginal revenue for amonopoly? Q P TR MR 0 $10 $0 -- 1 $8 $8 $8 2 $6 $12 $4 3 $4 $12 $0 4 $2 $8 -$4 5 $0 $0 -$8

  19. What’s the relationship between price and marginal revenue for amonopoly? Q P TR MR 0 $10 $0 -- Marginal revenue is 1 $8 $8 $8 below price because 2 $6 $12 $4 each additional unit 3 $4 $12 $0 you sell causes the 4 $2 $8 -$4 price of the other 5 $0 $0 -$8 units to drop also.

  20. Suppose McDonalds is currently selling 100 hamburgers at 50 cents each. TR = $50They lower their price to 40 cents and now sell 150. Will their total revenue rise by 50 hamburgers times 40 cents = $20?

  21. No. Total revenue rises by 50 hamburgers times 40 cents minus 100 hamburgers times 10 cents = $10. Let’s double-check. Q x P = TR100 hamburgers x 50 cents = $50150 hamburgers x 40 cents = $60Yep, it checks.

  22. How to graph the demand and marginal revenue curve for a monopoly. P For straight lines, the MR curve hits the horizontal axis halfway between where the demand curve does and the origin. D MR 0 Q 0

  23. What we learned today.1) 3 properties of monopoly.2) History of some monopolies in the U.S.3) Why marginal revenue is below price for a monopoly.

  24. Welcome to Day 15 Principles of Microeconomics

  25. What we learned last class.1) 3 properties of monopoly.2) History of some monopolies in the U.S.3) Why marginal revenue is below price for a monopoly.

  26. Goals for Today1) The best quantity/price choice for a monopolist.2) Monopoly price and quantity compared to perfect competition.3) Price discrimination.

  27. So how much will the monopolist produce, and what price will he charge? Q P TR TCπ MR MC 0 $10 $0 $0 $0 --- --- 1 $8 $8 $3 $5 $8 $3 2 $6 $12 $6 $6 $4 $3 3 $4 $12 $9 $3 $0 $3 4 $2 $8 $12 -$4 -$4 $3 5 $0 $0 $15 -$15 -$8 $3

  28. The Marginal Decision Rule AgainProduce the Quantity Where MR=MC Then up to the demand curve to determine the price.

  29. Profit or Loss? Same rule as before.P>ATC ProfitP<ATC Loss

  30. Price and quantity of donuts in a market with perfect competition. P Perfect Competition P=ATC MC=ATC Pc=0.4 D 0 Q 0 Qc=600

  31. Price and quantity of donuts in a monopoly. P m for monopoly c for competitive Monopoly MR=MC Pm=0.7 MC=ATC Pc=0.4 D MR 0 Q 0 Qc=600 Qm=300

  32. With perfect competition, the price of donuts is 40 cents and 600 are made.With monopoly, the price of the donuts is 70 cents and 300 are made.The monopolist makes less of the product to create a scarcity and raise the price up.

  33. Price discrimination is charging different prices to different customers.

  34. You would like to charge a higher price to the customers at the higher end of the demand curve. P D 0 Q 0

  35. Who are these people? Sometimes they are richer people. What traits are associated with being poor?

  36. What traits are associated with being poor?Traditionally, retired seniors have been poor, and students.

  37. It costs $6 to make dinners at your restaurant. When you charge $12, you get one customer, when you charge $10, you get two. Would you rather charge $12 or $10?Can you do better with price discrimination?What if you have noticed the additional customers when it is cheaper are mostly seniors?

  38. Charge straight $12Profit = $12 - $6 = $6Charge straight $10Profit = $20 - $12 = $8Charge one customer $12 and the other (senior) $10.Profit = $22 - $12 = $10

  39. This could also explain student discounts at the movie theater.What else could distinguish people from the high price end of the demand curve and the lower end?

  40. Think about men and women if this was demand for baseball tickets. P And what if it was demand at the hair salon? D 0 Q 0

  41. There’s a reason the Washington Nationals have ladies night and not mens night. There’s a reason California hair salons were sued for charging women higher prices.

  42. What about quantity discounts? There’s a reason bakers give a free donut if you buy a dozen. Donuts price = $1. Cost of making donuts = 50 cents.Sell 8 and charge for them all.Profit = $8 - $4 = $4Sell 13 and charge for 12.Profit = $12 - $6.50 = $5.50

  43. NEW YORK NYC Human Rights Commission Drops Charges Against Chinese RestaurantBy Meg Marco May 2, 2007 The case of the Wisconsin man who filed a complaint with the NYC Human Rights Commission has come to a close with the commission dropping charges against the restaurant.

  44. … “We saw other customers getting a different menu. We were told we could order from it if we spoke Chinese.” The Chinese menu had prices that were, on average, $1 cheaper per dish.

  45. Soon after the dust-up, Mayor Bloomberg urged a boycott of the shady Chinese restaurant. “It’s unconscionable to use race on any of these things, in terms of what kind of service, or how you charge, or whatever,” Bloomberg told the Daily News.

  46. The Human Rights Commission dropped the charges after the guy from Wisconsin settled with the restaurant for an undisclosed sum and, “a promise to change its menu – by “listing identical prices in English and Chinese for the same dishes,”

  47. What we learned today.1) Profit maximization for a monopolist.2) Monopoly vs. perfect competition.3) Price discrimination.

  48. Welcome to Day 16 Principles of Microeconomics

  49. What we learned last class.1) Profit maximization for a monopolist.2) Monopoly vs. perfect competition.3) Price discrimination.

  50. Goals for Today1) What is monopolistic competition?2) How do businesses in monopolistic competition behave?3) What is oligopoly?

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