1 / 46

Unit 4: Imperfect Competition

Learn about the characteristics of monopolies, their types, and why they are different from other market structures. Explore the concept of marginal revenue and its relationship with demand.

dkozlowski
Télécharger la présentation

Unit 4: Imperfect Competition

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Unit 4: Imperfect Competition Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly FOUR MARKET STRUCTURES Imperfect Competition 1

  2. 4

  3. 5 Characteristics of a Monopoly • 1. Single Seller • One firm controls the vast majority of a market • The firm IS the Industry 2. Unique good with no close substitutes 3. “Price Maker” • The firm can manipulate the price by changing the quantity it produces (ie. supply shifts to the left). Ex: California electric companies • 4. High Barriers to Entry • New firms can NOT enter market • No immediate competitors • Firm can make profit in the long-run • 5. Some “Nonprice” Competition • Despite having no close competitors, monopolies still advertise their products in an effort to increase demand. 5

  4. Examples of Monopolies What do you already know about monopolies? True or False? • All monopolies make a profit. • Monopolies are usually efficient. • All monopolies are bad for the economy. • All monopolies are illegal. • Monopolies charge the highest price possible • The government never prevents monopolies from forming. 6

  5. 7

  6. 4 types of monopolies Geographical Government Technological Natural

  7. 4 types of monopolies Geographical Technological Government Natural • Location or control of resources limits competition and leads to one supplier. Ex: Nowhere gas stations, Cable TV,Los Angeles Lakers

  8. 4 types of monopolies Geographical Technological Government Natural • Location or control of resources limits competition and leads to one supplier. • Patents and widespread availability of certain products lead to only one major firm controlling a market. Ex: Nowhere gas stations, Cable TV,Los Angeles Lakers Ex: Microsoft, Intel, Frisbee, Band-Aide…

  9. 4 types of monopolies Geographical Technological Government Natural • Location or control of resources limits competition and leads to one supplier. • Patents and widespread availability of certain products lead to only one major firm controlling a market. • Government allows monopoly for public benefits or to stimulate innovation. • The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years) Ex: Nowhere gas stations, Cable TV,Los Angeles Lakers Ex: Microsoft, Intel, Frisbee, Band-Aide… Ex: water company, firefighters, the army, pharmaceutical drugs, rubix cubes…

  10. 4 types of monopolies Geographical Natural Government Technological • Government allows monopoly for public benefits or to stimulate innovation. • The government issues patents to protect inventors and forbids others from using their invention. (20 yrs) • Economies of scale make it impractical to have smaller firms. • Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost. • Location or control of resources limits competition and leads to one supplier. Ex: water company, firefighters, the army, pharmaceutical drugs, rubix cubes… • Patents & widespread availability of certain products lead to only one major firm controlling a market. Ex: Electric Companies (SDGE) • If there were three competing electric companies they would have higher costs. • Having only one electric company keeps prices low Ex: Microsoft, Intel, Frisbee, Band-Aide… Ex: Nowhere gas stations, Cable TV,Los Angeles Lakers

  11. Drawing Monopolies Good news… • Only ONE graph because the firm IS the industry. • The cost curves are the same • The profit maximizing rule MR=MC still applies • Shut down point rule still applies 13

  12. The Main Difference • Monopolies (and all imperfectly competitive firms) have downward sloping demand curve. • Which means, in order to sell more, a firm must lower its price. • This changes MR… THE MARGINAL REVENUE DOES NOT EQUAL THE PRICE! 14

  13. Why MR is less than Demand? $10 $9 $9 $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 15

  14. Hotel Enigma • Three people check into a hotel. They pay $30 to the manager and go to their room. The manager finds out that the room rate is $25 and gives the bellboy $5 to return to the guests. On the way to the room the bellboy reasons that $5 would be difficult to split among three people so he pockets $2 and gives $1 to each person. Now each person paid $10 and got back $1. So they paid $9 each, totaling $27. The bellboy has another $2, adding up to $29.Where is the remaining dollar?

  15. Why MR is less than Demand? $10 $9 $9 MR < PRICE $8 $8 $8 $7 $7 $7 $7 $6 $6 $6 $6 $6 $5 $5 $5 $5 $5 $5 $4 $4 $4 $4 $4 $4 $4 17

  16. Why is MR below Demand? • How many units can be sold for a price of $10? • What is the total revenue at price of $10? TR=____ • How many units can be sold for a price of $9? • As price decreases from $10 to $9, TR=____ $10 $18 P($) TR will increase with the additional unit sold. 10 9 • 8 6 4 • How about MARGINALREVENUE? From 1 to 2 units, MR = $18-$10 = $8 Q 0 1 2 3 4 5 6

  17. Why is MR below Demand? $10 • What is the total revenue at price of $10? TR=____ • As price decreases from $10 to $9, TR=____ • As price decreases from $9 to $8, TR=____ $18 $24 As price continuously decreases, TR will increase. P($) TR will increase with the additional unit sold. 10 9 • 8 6 4 • How about MARGINALREVENUE? From 1 to 2 units, MR = $18-$10 = $8 From 2 to 3 units, MR = $24-$18 = $6 D MR Q 0 1 2 3 4 5 6

  18. Combine the Demand of an industry with the costs of a firm. MC ATC MR < Demand Costs (dollars) = Price D MR Quantity

  19. Calculating Marginal Revenue

  20. Demand & MR Curves Plot the Demand, MR & TR Curves What happens to TR when MR hits zero? $15 10 5 Dollars D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 MR $105 55 30 When MR goes negative, TR will fall Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12

  21. Elastic vs. Inelastic Range of Demand Curve 24

  22. Elastic vs. Inelastic Range $15 10 5 Elastic Inelastic Total Revenue Test If price & TR demand is… Dollars ELASTIC D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 MR Total Revenue Test If price & TR demand is… $105 55 30 Dollars A monopoly will only produce in the elastic range INELASTIC TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12

  23. What output should this monopoly produce? Price Q 01 2 3 4 5 6 7 8 9 10 Maximizing Profit MR = MC How much is the TR, TC and Profit or Loss? $9 8 7 6 5 4 3 2 Conclusion: Monopolists produce where MR=MC, but charges the price consumer are willing to pay identified by the demand curve. MC ATC Profit =$5 D MR

  24. What if cost is higher? Q 0 1 2 3 4 5 6 7 8 9 How much is the TR, TC and Profit or Loss? ATC $90 80 70 60 50 40 30 20 10 AVC MC Costs Loss Price Minimum AVC is shut down point D MR

  25. Quiz Time Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 TR = TC = Profit/Loss = Profit/Loss per Unit = ----------------- $780 ----------------- $600 ---------- $180 --- $30 ATC $175 150 125 100 75 50 MC $130 Profit=$180 $110 TR=$780 TC=$600 D MR

  26. Are Monopolies Efficient?

  27. Efficiency of Perfect Competition CS and PS of a Perfect Competition S = MC P An industry in perfect competition sells where supply & demand are equal CS Pc PS D Q Qc

  28. INEFFICIENCY OF MONOPOLY Monopolies underproduce & over charge, decreasing CS& increasing PS. CS and PS of a Monopoly Result is DEADWEIGHT LOSS to society S = MC P At MR=MC, A monopolist will produce less and charge higher price CS Pm Pc PS D Q Qc Qm MR

  29. MONOPOLIES AND EFFICIENCY Productive Efficiency The production of a good in a least costly way. (minimum amount of resources are being used) Graphically it is where… Price = Minimum ATC • Allocative Efficiency The apportionment of resources towards the production of products most wanted by society (as measured by their price). • Graphically it is where… • Price = MC

  30. Are Monopolies Efficient? 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 Price = Min ATC ? Price = MC ? Monopolies are NOT productive efficient • Monopolies are NOT allocative efficient MC ATC D MR

  31. Are Monopolies Efficient? Monopolies are NOT efficient! Monopolies are inefficient because… • They charge a higher price • They don’t produce enough • No allocative efficiency • They produce at higher costs • No productive efficiency • They have little incentive to innovate Why? Because there is little external pressure to be efficient 34

  32. 2004 AP Micro FRQ B #1 • Due to a new technology, Brunelle Inc. enjoys monopoly power. Brunelle does not engage in price discrimination. • Explain why the demand curve lies above the marginal revenue curve for Brunelle. • Assume that Brunelle is earning short-run economic profits. Using a correctly labeled graph, show the following for Brunelle. • Profit-maximizing level of output, labeled as Q* • Profit-maximizing price, labeled as P* • Economic profits, as a shaded area • (c) If Brunelle wants to maximize its total revenues instead of profits, using the graph from part (b) show the following • Revenue-maximizing level of output, label as Qr • Revenue-maximizing price, labeled as Pr • (d) Given your answer in part (b), indicate whether Brunelle is producing the allocatively efficient level of output. Explain. • (e) Explain what will happen to Brunelle’s demand curve as other firms adopt the same technology.

  33. Regulating Monopolies

  34. Regulating Monopoly Why would the government regulate an monopoly? To keep prices low To make monopolies efficient • How do they regulate? • Use Price controls: • a. Price Ceiling b. Price Floor • Why don’t taxes work? • Taxes limit supply and that’s the problem

  35. TAX Lump-Sum Tax Per Unit Tax Shift ATC NOT Marginal Cost Shift AVC, ATC & Marginal Cost Quantity Same Quantity  ? ? MC’ MC ATC’ $8 7 6 5 4 3 2 1 $8 7 6 5 4 3 2 1 MC MC ATC’ AVC’ ATC ATC ATC AVC AVC AVC D D MR MR 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

  36. REGULATING MONOPOLY What happens if the government sets a price ceiling to get the socially optimal quantity? Dilemma of Regulation Which Price? The firm would make a loss and would require a subsidy MR = MC Monopoly/Unregulated price MC ATC Pm Price and Costs Pf P = MC Socially-Optimum Price TR=TC Ps Fair-Return Price Normal Profit D MR Q Qf Qs Qm

  37. Where should the government place the price ceiling? Socially-Optimum Price P = MC (Allocative Efficiency) OR Fair-Return Price P = ATC (Normal Profit)

  38. 2007 AP Micro FRQ A #1 • A patent gives inventors the exclusive right to produce and market a product for a period of time. GCR Company is a profit-maximizing firm. It has a patent for a unique antispyware computer program called Aspy. • Assume that GCR is making economic profit. Draw a correctly labeled graph and show the profit-maximizing price and quantity. • (b) Assume that the government imposes a lump-sum tax on GCR. • What will happen to output and market price? Explain. • What will happen to GCR’s profits? • (c) Assume instead that the government grants a per-unit subsidy to GCR for Aspy. • What will happen to output and market price? Explain. • What will happen to GCR’s profits?

  39. Price Discrimination

  40. PRICE DISCRIMINATION Practice of selling specific products to different buyers at different prices. • Conditions • Firm must have monopoly power • Firm must be able to segregate the market • Consumers must not be able to resell product

  41. PRICE DISCRIMINATION • Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. • Those with elastic demand are charged less than those with inelastic. • Examples: • Airline Tickets (vacation vs. business) • College • All Coupons (spenders vs. savers) • WHS soda machine (students vs. teachers)

  42. Monopoly NON-PRICE DISCRIMINATION P • Economicprofits@ one MR=MC price MC ATC Price Costs D MR Q Q1

  43. PRICE DISCRIMINATION A perfectly discriminating monopolist has MR=D, producing more product and more profit! P Economic profits with price discrimination MC ATC Price and Costs MR D Q MR’ Q1 Q2

  44. PRICE DISCRIMINATION A perfectly discriminating monopolist has MR=D, producing more product and more profit! P Economic profits with price discrimination MC ATC Price and Costs D MR Q MR’ Q1 Q2

  45. PRICE DISCRIMINATION A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand What’s the Point? • Perfectly price discriminating firms: • Make more profit • Produce more • Produce at allocative efficiency Price Discrimination results in several prices, more profit, No CS, and a higher socially optimal quantity

  46. Can You Do The Following? Draw a monopoly making a profit identify price, quantity, and profit. Draw a perfectly competitive industry AND firm at long-run equilibrium Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit

More Related