Transcript Chapter 9 Monopoly • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing.

Chapter 9
Monopoly
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1
In this chapter, you will
learn to solve these
economic puzzles:
Why
doesn’t
the
monopolist
AreHow
medallion
cabs
in
can price by
gouge
consumers
New
York
City
discrimination
be fair?
charging
the
highest
monopolists?
possible price?
2
What is a Monopoly?
• Single seller
• Unique product
• Impossible entry into
the market
3
What are the most
common Monopolies?
Local monopolies are more
common real-world
approximations of the
model than national or
world market monopolies
4
What does it mean to
have a Unique Product?
There are no close
substitutes for the
monopolists product
5
What are some examples
of Impossible Entry?
• Owner of a vital resource
• Legal barriers
• Economies of scale
6
What is a
Natural Monopoly?
An industry in which the
long-run average cost of
production declines
throughout the entire market
7
What is unique about a
Natural Monopoly?
A single firm will produce
output at a lower per-unit
cost than two or more
firms in the industry
8
What is a Price Maker?
A firm that faces a
downward-sloping
demand curve
9
What is the difference
between Monopoly and
Perfect Competition?
The D and MR curves of
the monopolist are
downward sloping; in
perfect competition
they are horizontal
10
What is unique about the
Demand Curve for a
Monopolist?
The monopolist demand
curve and the industry
demand curve are one
in the same
11
Cost per Unit (dollars)
40
35
30
25
20
15
10
5
Minimizing Costs in a
Natural Monopoly
5 firms
2 firms
1 firm
Quantity of Output
20
40
60
80
100
12
What determines Price
for a Monopolist?
Demand
13
Why is MR < P for all but
the first unit of output?
To sell additional units, the
price has to be lowered;
this price-cut applies to all
units, not just the last unit
14
0
$-25
$-50
$-75
$-100
Price & Marginal Revenue
$100
$75
$50
$25
Monopoly
2 4 6 8 10 12 14 16 18 Q
15
Monopoly
$300
$200
$100
Total Revenue
$400
2 4
6 8 10 12 14 16 18 Q
16
Where does a Monopolist
produce to maximize
profit or minimize losses?
MR = MC
17
P
$200
$175
$150
$125
$100
$75
$50
$25
MR=MC
MC
ATC
Profit
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
18
P
$200
$175
$150
$125
$100
$75
$50
$25
MC
ATC
MR=MC
Loss
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
19
Can a Monopolist make a
profit in the long-run?
If the positions of a
monopolist’s demand and
cost curves give it a profit
and nothing disturbs these
curves, it can make a
profit in the long-run
20
What is
Price Discrimination?
The practice of a seller
charging different prices for
the same product not
justified by cost differences
21
What is
Arbitrage?
The practice of earning a
profit by buying a good at a
low price and reselling the
good at a higher price
22
Is Price
Discrimination unfair?
Many buyers benefit from
the discrimination by not
being excluded from
purchasing the product
23
Is Monopoly efficient?
A monopolist is characterized
by inefficiency because
resources are underallocated
to the production of its
product
24
P
Price Discrimination
Market for average students
MR=MC
T1
MC
MR
Q1
D
Q
25
P
Price Discrimination
Monopolist
Market for superior students
MR=MC
MC
T2
MR
Q2
D
Q
26
Is Perfect Competition
Efficient?
A perfectly competitive firm
that produces where P =
MC achieves an efficient
allocation of resources
27
P
Perfect Competition
MR=MC
MC
MR, D
Pc
Qc
Q
28
P
Monopolist
MR=MC
MC
Pm
MR
Qm
D
Q
29
How does Monopoly
harm Consumers?
It charges a higher price
and produces a lower
quantity than would be
the case in a perfectly
competitive situation
30
P
Impact of Monopolizing
and Industry
MR=MC
MC
Pm
Pc
MR
Qm Qc
D
Q
31
What is the case
against Monopoly?
• Higher price
• Charges a Price > MC
• Long-run economic profit
• Alters the distribution of
income to favor monopolist
32
Key Concepts
33
Key Concepts
•
•
•
•
•
What is a Monopoly?
What is a Natural Monopoly?
What is unique about a Natural Monopoly?
What is a Price Maker?
What is the difference between Monopoly
and Perfect Competition?
• Why is MR < P for all but the first unit of
output?
34
Key Concepts cont.
• Where does a Monopolist produce to
maximize profit or minimize losses?
• Can a Monopolist make a profit in the
long-run?
• What is Price Discrimination?
• How does Monopoly harm Consumers?
35
Summary
36
Monopoly is a single seller
facing the entire industry demand
curve because it is the industry. The
monopolist sells a unique product,
and extremely high barriers to entry
protect it from competition.
37
Barriers to entry that prevent
new firms from entering an industry
are (1) ownership of an essential
resource, (2) legal barriers, and (3)
economies of scale. Government
franchises, licenses, patents, and
copyrights are the most obvious legal
barriers to entry.
38
A natural monopoly arises because
of of economies of scale in which the
LRAC curve falls as production
increases. Without government
restrictions, economies of scale allow a
single firm to produce at a lower cost
than any firm producing a smaller
output. Thus, smaller firms leave the
industry, new firms fear competing with
the monopolist, and the result is that a
monopoly emerges naturally.
39
Cost per Unit (dollars)
40
35
30
25
20
15
10
5
Minimizing Costs in a
Natural Monopoly
5 firms
2 firms
1 firm
Quantity of Output
20
40
60
80
100
40
A price-maker firm faces a
downward-sloping demand curve. It
therefore searches its demand curve
to find the price-output combination
that maximizes its profit and
minimizes its loss.
41
The marginal revenue and the
demand curves are downwardsloping for a monopolist. The
marginal revenue curve for a
monopolist is below the demand
curve, the total revenue curve
reaches its maximum where
marginal revenue equals zero.
42
Price elasticity of demand
corresponds to sections of the
marginal revenue curve. When MR
is positive, price elasticity of
demand is elastic, Ed > 1. When MR
is equal to zero, price elasticity of
demand is unit elastic, = 1. When
MR is negative, price elasticity of
demand is inelastic, Ed < 1.
43
The short-run-profit-maximizing
monopolist, like the perfectly
competitive firm, locates the profitmaximizing price by producing the
output where the MR and the MAC
curves intersect. If this is less than the
AVC curve, the monopolist shuts
down to minimize losses.
44
P
$200
$175
$150
$125
$100
$75
$50
$25
MR=MC
MC
ATC
Profit
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
45
P
$200
$175
$150
$125
$100
$75
$50
$25
MC
ATC
MR=MC
Loss
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
46
The long-run-profit-maximizing
monopolist earns a profit because of
barriers to entry. If demand and cost
conditions prevent the monopolist from
earning a profit, it will leave the
industry.
47
Price discrimination allows the
monopolist to increase profits by
charging buyers different prices,
rather than a single price.
48
Three conditions are necessary
for price discrimination: (1) the
demand curve must be downwardsloping, (2) buyers in different
markets must have different price
elasticities of demand, and (3) buyers
must be prevented from reselling the
product at a higher price than the
purchase price.
49
P
Price Discrimination
Market for average students
MR=MC
T1
MC
MR
Q1
D
Q
50
P
Price Discrimination
Monopolist
Market for superior students
MR=MC
MC
T2
MR
Q2
D
Q
51
Monopoly disadvantages are these:
(1) A monopolist charges a higher price
and produces less output than a
perfectly competitive firm, (2) resource
allocation is inefficient because the
monopolist produces less than if
competition existed, (3) monopoly
produces higher long-run profits than if
competition existed, and (4) monopoly
transfers income from consumers to
producers to a greater degree than
under perfect competition.
52
P
Perfect Competition
MR=MC
MC
MR, D
Pc
Qc
Q
53
P
Monopolist
MR=MC
MC
Pm
MR
Qm
D
Q
54
Chapter 9 Quiz
©2000 South-Western College Publishing
55
1. A monopolist always faces a demand curve
that is
a. perfectly inelastic.
b. perfectly elastic.
c. unit elastic.
d. the same as the market demand curve.
D. A monopoly is the only seller, so there is no
distinction between the market demand
curve and the individual demand curve.
56
2. A monopoly sets the
a. price at which marginal revenue equals
zero.
b. price that maximizes total revenue.
c. highest possible price on its demand curve.
d. price at which marginal revenue equals
marginal cost.
D. Profits are always maximized if the firm
produces at the point where MR = MC.
57
P
$80
$70
$60
$50
$40
$30
$20
$10
MR=MC
MC
ATC
Profit
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
58
3. A monopolist sets
a. the highest possible price.
b. a price corresponding to the minimum
average total cost.
c. a price equal to marginal revenue.
d. a price determined by the point on the
demand curve corresponding to the level
of output at which marginal revenue
equals marginal cost.
e. none of the above.
D. Demand determines price in all market
forms.
59
4. Which of the following is true for the
monopolist?
a. Economic profit is possible in the long-run.
b. Marginal Revenue is less than the price
charged.
c. Profit maximizing or loss minimizing
occurs when marginal revenue equals
marginal cost.
d. All of the above are true.
D. All of the above are characteristics of
a monopoly.
60
P$40
Exhibit 8
MC
$30
ATC
$20
AVC
$10
MR
100
200 300
D
Q
400
61
5. As shown in Exhibit 8, the profitmaximizing or loss-minimizing output
for this monopolist is
a. 100 units a day.
b. 200 units a day.
c. 300 units a day.
d. 400 units a day.
B. 200 units is the point at which MR = MC.
62
6. As shown in Exhibit 8, this monopolist
a. should shut down in the short-run.
b. should shut down in the long-run.
c. earns zero economic profit.
d. earns positive economic profit.
D. At the point where MR = MC (on the
vertical line), P is greater than ATC;
therefore, total revenue is greater than total
cost and an economic profit is being made.
63
7. To maximize profit or minimize loss, the
monopolist in Exhibit 8 should set its price at
a. $30 per unit.
b. $25 per unit.
c. $20 per unit..
d. $10 per unit.
e. $40 per unit.
B. Maximum profit or minimized losses are
found by drawing a vertical line where
MR = MC. This line intersects the
demand curve at $25.
64
8. If the monopolist in Exhibit 8 operates at
the profit-maximizing output, it will earn
total revenue to pay about what portion of
its total fixed cost?
a. None.
b. One-half.
c. Two-thirds.
d. All total fixed costs.
D. Since the monopolist is making a
profit, it can pay all of its fixed costs.
65
9. For a monopolist to practice effective price
discrimination, one necessary condition is
a. identical demand curves among groups of
buyers.
b. differences in the price elasticity of demand
among groups of buyers.
c. a homogeneous product.
d. none of the above.
B. Price discrimination takes place when a
monopolist is faced with buyers that are
widely different; therefore, the buyers
elasticity of demand for the product will
be different.
66
10. What is the act of buying a commodity at a
lower price and selling it at a higher price?
a. Buying short.
b. Discounting.
c. Tariffing.
d. Arbitrage.
D. The practice of earning a profit by
buying a good at a low price and reselling
the good at a higher price
67
11. Under both perfect competition and
monopoly, a firm
a. is a price taker.
b. is a price maker.
c. will shut down in the short run if price falls
short of average total cost.
d. always earns a pure economic profit.
e. sets marginal cost equal to marginal
revenue.
E. The profit maximizing output for any
firm is where MR = MC.
68
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