Monopoly - economics Essay Example for Free

Monopoly economics EssayIn this chapter, look for the answers to these questions ? Why do monopolies arise? ? Why is MR P for a monopolist? ? How do monopolies choose their P and Q? ? How do monopolies affect societys well-being? ? What can the government do about monopolies? ? What is footing inconsistency? Economics PRINCIPLES OF N. Gregory Mankiw bountifulness PowerPoint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved 1 Introduction ? A monopoly is a blind drunk that is the sole mete outer of a product without culmination substitutes. Why Monopolies Arise.The main cause of monopolies is barriers to entry other firms cannot enter the food merchandise. Three sources of barriers to entry 1. A single firm owns a anchor resource. E. g. , DeBeers owns most of the satisfyingitys diamond mines 2. The govt gives a single firm the exclusive right to produce the good. E. g. , patents, copyright laws 2 ? In this chapter, we study monopoly and contrast it with perfect competition. ? The key difference A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power.MONOPOLY MONOPOLY 3 Why Monopolies Arise3. Natural monopoly a single firm can produce the entire market Q at lower price than could several firms. deterrent example 1000 homes need electricity ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. MONOPOLY Monopoly vs. Competition imply Curves In a competitive market, the market demand curve slopes downward. But the demand curve for any individual firms product is plane at the market price. The firm can increase Q without lowering P, so MR = P for the competitive firm.4 Cost Electricity ATC slopes downward due to abundant FC and small MC ATC 500 1000 Q P A competitive firms demand curve $80 $50 D Q 5 MONOPOLY 1 10/23/2012 Monopoly vs. Competition engage Curves A monopolist is the on ly seller, so it faces the market demand curve. To sell a larger Q, the firm must avoid P. Thus, MR ? P. P ACTIVE LEARNING A monopolys revenue Common Grounds is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. Q 0 1 2 3 4 5 6 P $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 7 1 TR AR n. a. MR A monopolists demand curve D Q MONOPOLY 6 What is the relation between P and AR?Between P and MR? ACTIVE LEARNING Answers Here, P = AR, same as for a competitive firm. Here, MR P, whereas MR = P for a competitive firm. Q 0 1 2 3 4 5 6 1 Common Grounds D and MR Curves P TR $0 4 7 9 10 10 9 AR n. a. $4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 8 MR $4 3 2 1 0 1 Q P MR $4 3 2 1 0 1 $4. 50 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 0 $4. 50 1 2 3 4 5 6 4. 00 3. 50 3. 00 2. 50 2. 00 1. 50 P, MR $5 4 3 2 1 0 -1 -2 -3 0 1 2 3 Demand curve (P) MR 4 5 6 7 Q 9 MONOPOLY Understanding the Monopolists MR ? Increasing Q has two effects on reve nue ? proceeds effect higher output raises revenue ?Price effect lower price reduces revenue ? To sell a larger Q, the monopolist must reduce the price on all the units it sells. Profit-Maximization ? Like a competitive firm, a monopolist maximizes profit by producing the quantity where MR = MC. ? Once the monopolist identifies this quantity, it sets the highest price consumers ar willing to pay for that quantity. ? Hence, MR P ? MR could even be negative if the price effect exceeds the output effect (e. g. , when Common Grounds increases Q from 5 to 6). 10 ? It finds this price from the D curve. MONOPOLY MONOPOLY 11 2 10/23/2012 Profit-Maximization1. The profitmaximizing Q is where MR = MC. 2. Find P from the demand curve at this Q. Q Costs and Revenue MC The Monopolists Profit Costs and Revenue MC ATC P D MR Quantity As with a competitive firm, the monopolists profit equals (P ATC) x Q P ATC D MR Q Quantity Profit-maximizing output MONOPOLY 12 MONOPOLY 13 A Monopoly Does Not H ave an S Curve A competitive firm ? takes P as given ? has a supply curve that shows how its Q depends on P. A monopoly firm ? is a price-maker, not a price-taker ? Q does not depend on P rather, Q and P are jointly determined by MC, MR, and the demand curve.So there is no supply curve for monopoly. MONOPOLY 14 CASE STUDY Monopoly vs. generic Drugs Patents on new drugs give a temporary monopoly to the seller. Price The market for a typical drug PM When the patent expires, PC = MC the market becomes competitive, generics appear. QM D MR Quantity QC MONOPOLY 15 The well-being Cost of Monopoly ? Recall In a competitive market equilibrium, P = MC and total surplus is maximized. The Welfare Cost of Monopoly Competitive eqm quantity = QC P = MC total surplus is maximized Monopoly eqm quantity = QM P MC deadweight red ink Price Deadweight MC loss?In the monopoly eqm, P MR = MC ? The value to buyers of an special unit (P) exceeds the cost of the resources needed to produce that unit (M C). ? The monopoly Q is to a fault low could increase total surplus with a larger Q. ? Thus, monopoly results in a deadweight loss. P P = MC MC D MR QM QC Quantity MONOPOLY 16 MONOPOLY 17 3 10/23/2012 Price Discrimination ? Discrimination treating people differently based on some characteristic, e. g. race or gender. complete Price Discrimination vs. Single Price Monopoly Here, the monopolist charges the same price (PM) to all buyers. A deadweight loss results.Price Consumer surplus Deadweight loss ? Price contrariety selling the same good at different prices to different buyers. PM MC ? The characteristic used in price discrimination is willingness to pay (WTP) ? A firm can increase profit by charging a higher price to buyers with higher WTP. Monopoly profit D MR QM MONOPOLY 18 Quantity 19 MONOPOLY consummate(a) Price Discrimination vs. Single Price Monopoly Here, the monopolist produces the competitive quantity, but charges each buyer his or her WTP. This is called perfect pr ice discrimination. The monopolist captures all CS as profit.But theres no DWL. MONOPOLY Price Discrimination in the Real World ? In the real world, perfect price discrimination is not possible ? No firm knows every buyers WTP ? Buyers do not announce it to sellers Price Monopoly profit ? So, firms divide customers into groups MC D MR Quantity based on some observable trait that is likely related to WTP, such as age. Q 20 MONOPOLY 21 Examples of Price Discrimination video tickets Discounts for seniors, students, and people who can attend during weekday afternoons. They are all more likely to have lower WTP than people who pay full price on Friday night.airline prices Discounts for Saturday-night stayovers help distinguish business travelers, who usually have higher WTP, from more price-sensitive leisure travelers. MONOPOLY 22 Examples of Price Discrimination Discount coupons People who have epoch to clip and organize coupons are more likely to have lower income and lower WTP than others. Need-based financial aid Low income families have lower WTP for their childrens college education. Schools price-discriminate by offering need-based aid to low income families. MONOPOLY 23 4 10/23/2012 Examples of Price DiscriminationQuantity discounts A buyers WTP often declines with additional units, so firms charge less per unit for large quantities than small ones. Example A movie theater charges $4 for a small popcorn and $5 for a large one thats twice as big. Public constitution Toward Monopolies ? Increasing competition with antitrust laws ? Ban some anticompetitive answers, allow govt to interrupt up monopolies. ? E. g. , Sherman Antitrust Act (1890), Clayton Act (1914) ?Regulation ? Govt agencies set the monopolists price. ? For natural monopolies, MC ATC at all Q, so marginal cost pricing would result in losses. ? If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit. MONOPOLY 24 MONOPOLY 25 Public Policy Toward Monopolies ?Pu blic ownership ? Example U. S. Postal Service ? Problem Public ownership is usually less efficient since no profit motive to minify costs CONCLUSION The Prevalence of Monopoly ? Doing nothing ? The foregoing policies all have drawbacks, so the best policy may be no policy. ? In the real world, pure monopoly is rare. ? Yet, many firms have market power, due to ? selling a unique variety of a product ? having a large market package and few significant competitors ?In many such cases, most of the results from this chapter apply, including ? markup of price over marginal cost ? deadweight loss MONOPOLY 26 MONOPOLY 27 CHAPTER outline ? A monopoly firm is the sole seller in its market. Monopolies arise due to barriers to entry, including government-granted monopolies, the control of a key resource, or economies of scale over the entire range of output. CHAPTER SUMMARY ? Monopoly firms maximize profits by producing the quantity where marginal revenue equals marginal cost. But since marg inal revenue is less than price, the monopoly price will be greater than marginal cost, leading to a deadweight loss. ?A monopoly firm faces a downward-sloping demand curve for its product. As a result, it must reduce price to sell a larger quantity, which causes marginal revenue to fall below price. 28 ? Monopoly firms (and others with market power) try to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination. 29 5 10/23/2012 CHAPTER SUMMARY ? Policymakers may respond by regulating monopolies, using antitrust laws to promote competition, or by taking over the monopoly and running it. Due to problems with each of these options, the best option may be to take no action. 30 6.