Monopolies

1. Monopolies Marc Schwartzberg Mr. Gill AP. Micro 14, January 2011

2. Key concepts • Monopolistic competition: A market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry and exit into the firm in the long run. • Monopolist: A firm that is the only producer of a good that has no close substitutes • Natural Monopoly: An monopoly that exists when increasing returns to scale provide a large cost advantage to having all output produced by a single firm • Local monopoly: A monopoly limited to a specific geographical area • Monopoly: An industry controlled by a monopolist • Monopsony: A market in which there is only one buyer. • Price discrimination:The business practice of selling the same good at different prices to different consumers • State monopoly: A monopoly that is owned and managed by a government - also known as a nationalized industry

3. Graphs • Monopolist maximizes profit by producing the level of output at which MR=MC.

4. Formulas • MR=MC at the monopolists profit maximizing quantity of output. • P=MC at the perfectly competitive firms profit maximizing quantity of output. • P>MR=MC at the monopolist profit maximizing quantity of output.

5. Monopoly and Oligopoly • These systems are both large and dominating in the economic system. The main difference between the two is a monopoly contains one seller, while an oligopoly contains two or more. Also a monopoly has no substitute and an oligopoly has few substitutes.

6. Monopoly and Perfect competition • Compared to a perfectly competitive market, a monopoly is the only producer of a product. • Perfect competition is a monopolies opposite.There are many sellers and similar products, with many substitutes. There are few barriers of entry and exit.

7. 2009 AP micro exam • 1. CableNow is the only supplier of cable TV services offering a wide range of TV channels. CableNow is an unregulated firm and is currently earning an economic profit. Assume that CableNow does not practice price discrimination. • (a) Draw a correctly labeled graph for CableNow and show each of the following. Make sure your graph is large enough to be legible. • (i) The profit-maximizing quantity of cable services, labeled as Q* • (ii) The profit-maximizing price, labeled as P* • (iii) The area of economic profit, completely shaded • (iv) The socially optimal level of cable services, assuming no externalities, labeled as QS • (b) Assume that the government grants CableNow a lump-sum subsidy of $1 million. Will this policy change CableNow’s profit-maximizing quantity of cable services? Explain. • (c) Instead of granting a subsidy, assume now that the government chooses to require CableNow to produce the quantity at which CableNow earns zero economic profit. On the graph you drew in part (a), label this quantity QR. • (d) At QR, is the firm’s accounting profit positive, negative, or zero? Explain. • (e) Assume that a new study reveals there are external benefits associated with watching TV. Will the socially optimal quantity of cable services now be larger than, smaller than, or equal to the QS you identified in part(a)(iv) ?

8. 2009 Answers • Question 1(a) 5points: ･One point is earned for a correctly labeled graph for CableNow, with a downward-sloping demand curve and with the marginal revenue curve below the demand curve. • ･One point is earned for identifying the profit-maximizing quantity of cable services, Q*, at MC = MR. • ･One point is earned for identifying the profit-maximizing price of cable services, P*, on the demand curve above Q*. • ･One point is earned for showing the area of economic profit, completely shaded. • ･One point is earned for identifying the socially optimal level of cable services, QS, where the MC curve intersects the demand curve.-(The graph should appear as I does because CableNow is earning a profit) • (b) 2 points: ･One point is earned for stating that the lump-sum subsidy will have no impact on the quantity of services CableNow produces. (This is because CableNow is a monopoly) • ･One point is earned for explaining that the lump-sum subsidy will not affect MC. • (c)1 point: ･One point is earned for identifying the quantity of cable services, QR, where the ATC curve intersects the demand curve. • (d) 2 points: ･One point is earned for stating that accounting profit is positive. • ･One point is earned for explaining that accounting profit excludes implicit costs. • (e) 1 point: ･One point is earned for stating that the socially optimal quantity will be larger than QS.

9. Multiple choice • A monopoly has a) A lot of competition b) A perfectly elastic demand curve c) A downward slopping demand curve d) No market power e) No ability to sustain Lon run economic power • A monopoly would always be earning a profit if a) Its price were greater then its marginal cost b) Its price were less then its marginal cost c)Its demand increased d) Its price were greater than its average total cost • In order to be productively efficient, a profit earning monopoly would have to a) Increase its output b) Decrease it output c) Keep its output constant d) Increase its price

10. Multiple Choice Answers • C- look at the graph on the 3rd slide • A- To be productively efficient you need to produce the most output from the least input • D- If there price is greater then average total cost then when they sell their item they are making a profit

11. Real Life Links • http://www.econedlink.org/lessons/index.php?lid=628&type=educator • http://www.sjsu.edu/faculty/watkins/ironsalt.htm

12. Rap • My concept is monopoly often confused with oligopoly but those be people just thinking sloppily they need two heads like a duopoly. Cause a monopoly is when one has complete control. When given a public opinion poll most say it’s a business of a dead soul, sorry to get on that theatrical role. But most say it ruins the public economy, And that most achieve a level of autonomy. There mind set is a perfect competition wanna be. Monopolies set out to maximize profit, continuously people stand with picket signs that say stop it. They don’t want places like Wal-Mart in their town, but Wal-Mart laughs and refuses to back down, they acknowledge it as back round sound.