Transcript Slide 1

1.
3.
4.
5.
One Seller 2. One Product
Blocked Entry (and exit?)
Non-Price competition
LR profits/losses
6. Price Maker (to maximize profits)
Barriers to Entry
1. economies of scale
2. government licensing
3. Patents
4. control over an essential resource
The diagram shows demand and long-run cost conditions in an industry
a.
Explain why the industry is likely to be
monopolized.
Price
b.
Indicate the monopolist’s output level, and
label it Q.
c.
Indicate the price that a profit-maximizing
monopolist would charge, and label it P
d.
Indicate the maximum profits of the
monopolist.
e.
Will the profits attract competitors to the
industry? Yes ___
No ____
Explain why or why not
MC
LRATC
d
MR
Quantity/time
Name: ____________________
Price and Output Under Monopoly
• Expand output as long
as MR > MC. (P goes
Price
MC
down)
• Output level q will result …
with price determined by the
height of the demand curve
at that level of output, P.
• At q the average total
cost per unit for that scale
of output is C.
• As P > C (price > ATC) the
firm is making economic
profits equal to the area
PABC.
Economic
profits
ATC
A
P
B
C
d
MR < MC
MR > MC
MR
q
Quantity/time
Price and Output Under Monopoly
• A monopolist will reduce price and expand output as long
as MR > MC.
• As the monopolist reduces price and expands output,
profits increase …
until the point where MC > MR.
• Here an output of 8 a day will maximize profits.
Output
Price
(per day)
(per unit)
(1)
(2)
0
----
1
2
3
4
5
6
7
8
9
10
$25.00
$24.00
$23.00
$22.00
$21.00
$19.75
$18.50
$17.25
$16.00
$14.75
Total
revenue
= (1)*(2)
(3)
-----
Total
costs
(per day)
(4)
$50.00
$60.00
$25.00
$69.00
$48.00
$77.00
$69.00
$84.00
$88.00
$90.50
$105.00
$96.75
$118.50
$102.75
$129.50
$108.50
$138.00
$114.75
Maximum
$144.00
$121.25
$147.50profits
Profit
= (3) - (4)
(5)
-$50.00
-$35.00
-$21.00
-$8.00
$4.00
$14.50
$21.75
$26.75
$29.50
$29.25
$26.25
Marginal
cost
(6)
---$10.00
$9.00
$8.00
$7.00
$6.50
$6.25
$6.00
$5.75
$6.25
$6.50
Marginal
revenue
(7)
----
<
<
<
<
<
<
<
<
$25.00
$23.00
$21.00
$19.00
$17.00
$13.50
$11.00
$8.50
$6.00
$3.50
60
50
40
30
20
10
0
1
2
3
4
5
6
7
8
9
10
Number of Cakes
Profits Under Monopoly
• High entry barriers protect monopolists
from competitive pressures.
– Monopolists can earn long-run profits.
• However even a monopolist will not
always be able to earn profit.
– When ATC is always above the demand
curve, the monopolist will be unable to
cover costs (unable to earn a profit).
When a Monopolist Incurs Losses
Price
• A monopolist will set output
equal to q, where MR = MC
• At this level of output, the
price that the monopolist
C
charges does not cover the
average total cost of
P
producing the output ( P < C ).
• Whenever the ATC curve
lies always above the demand Short-run
losses
curve, the monopolist will
incur short-run losses.
• In this diagram the firm is
making economic losses
equal to the shaded area,
CABP.
MC
ATC
A
B
d
MR
q
Quantity/time
Regulation of a Monopolist
• An unregulated monopolist
produces where MR = MC
(Q0) and charge price P0.
Price
• From an efficiency
viewpoint, this output is too
small and the price is too high.
1. average cost pricing
The monopolist is forced to
reduce its price to P1 the
expand output to Q1.
2. marginal cost pricing
-Force output to be expanded
to Q2 where P = MC
- P = cost to produce
-Forces LR losses.
Average cost
pricing
Marginal cost
pricing
P0
LRATC
P1
MC
P2
D
MR
Q0
Q1
Q2
Quantity/time
Characteristics?
1. Few Sellers
2. Differentiated or
Identical Products
3. Difficult Entry and Exit
4. Non-Price competition
5. LR profits/losses
6. Price Maker
high
A
low
$57
high
B
$60
C
low
$69
$59
$55
$50
D
$58
$55
price
elastic
P TR
P
Current
Price and
Quantity
inelastic
P
MC1
MC2
MC3
TR
D=AR
Q
quantity
MR
1. Overt Collusion
a. Formal Agreement to set
Prices
b. OPEC
2. Covert Collusion
a. Secret agreements
b. Electric switch makers in the 50s
3. Gentlemen’s Agreements
a. Agree on price then use nonprice competition
b. Types of agreements
1) Price Leadership - GM
-dominant firm set price
-others follow
2) Cost-Plus Pricing
- Set price based on ATC at 85%
capacity
1. More firms, more likely to cheat
2. Firms may cheat in non-price
ways – free services
3. Requires barriers to remain high
4. Unstable demand/business cycles
5. Illegal - use Gentlemen’s agreements
6. Difficult to hold the price
When economies of scale are important and an industry tends toward natural
monopoly, splitting the industry into small, rival firms will
a. lead to lower prices in the short run.
b. cause prices to rise when demand is inelastic but fall when it is elastic.
c. cause prices to fall because of the decline in producer profits.
d. increase per-unit costs of production.
A monopolist will maximize profits by
a. setting his price as high as possible.
b. setting his price at the level that will maximize per-unit profit.
c. producing the output where marginal revenue equals marginal cost and
charging the price on the demand curve at that quantity.
d. producing the output where price equals marginal cost.
Which of the following is the most accurate description of a monopolist?
a. a firm that produces a single product
b. a firm that is the sole producer of a narrowly defined product class, such
as yellow, grade-A butter produced in Jackson County, Wisconsin
c. a firm that is the sole producer of a product for which there are no good
substitutes in a market with high barriers to entry
d. a firm that is large relative to its competitors
Oligopolistic agreements on price tend to be unstable because
a. although the monopoly price is the best price for all firms, oligopolists are
unaware of this.
b. although the monopoly price maximizes the joint profits of the firms, a secret
price cut by any individual firm will increase the profits of that firm; hence,
collusive agreements tend to break down.
c. the demand for the products of oligopolistic industries is inherently unstable
relative to the demand for the products of non-oligopolistic industries.
d. firms in oligopolistic industries have more concern for consumers than do firms
in competitive industries.
When firms use resources in an attempt to secure and maintain grants of
market protection from the government, it is called
a. rent seeking
b. franchising.
c. collusion.
d. resource investment
The incentive for the managers of a government-operated firm (for example, a state
university) to promote internal efficiency and keep costs low will be
a. weak because it will be difficult for voters and their representatives to monitor
and eliminate the inefficiency of such firms.
b. strong because public officials will have little concern for personal gain.
c. strong because voters can easily recognize inefficiency and penalize the publicsector managers who are responsible.
d. weak because government employees are less competent than those who work in
the private sector.
What price and output in the graph
would an unregulated profitmaximizing monopolist choose?
a. price C and output R
b. price B and output R
c. price B and output S
d. price A and output T
Would they be making a profit?
a. yes
b. no
c. normal but not economic
d. can’t tell
If a regulatory agency were using the “normal return” (zero economic
profit) criteria to impose a price on a monopolist with the cost and
demand conditions depicted, what price would the regulators set, and
what output would the monopolist produce?
a. price A and output T
b. price C and output R
c. price B and output R
d. price B and output S