1. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Imperfect Competition

2. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Imperfect Competition Opening Question –In your notebook, brainstorm: THREE similarities and two differences between: a)The way MONOPOLY works and b) The way the US economy works

3. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Market Structures: Sellers (top), and Buyers (bottom)

4. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Defining Imperfect Competition IMPERFECT COMPETITION Monopolistic Competition Oligopoly Monopoly

5. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Defining Monopoly MONOPOLY (noun) Plural: monopolies –Etymology: Latin monopolium, from Greek monop ō lion, from mon- (one) + p ō leo (to sell or to barter) –First recorded use (1534) –Definition: A pure monopoly is an industry with exactly ONE firm that produces the market’s entire quantity supplied

6. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Preview: Pure Monopoly (Graph)

7. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Characteristics of a Pure Monopoly Single Seller Asymmetric Information No Close Substitutes Total Control over Price (“Price- Maker” not a “Price-taker”) Avoids Competition through Barriers to Entry [Remember that Santa is a monopolist]

8. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Barriers to Entry Legal Barriers Patents, Licenses, Copyrights, Trademarks, … Economies of Scale Keeps competition out, since the per unit cost for small companies are much higher than the larger, established monopolist. Control of Key Resource Can keep competitors from producing Network Superiority If the value to consumers increases as more people use it (ie. Microsoft Office programs… in terms of compatibility and familiarity)

9. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Terms Natural Monopoly An industry that runs most efficiently as a monopoly ________________________________________ Regulated Monopoly When government places regulations upon the monopolist (sets price limits or output quotas) Unregulated Monopoly A monopolist free from government regulation. If unregulated, The firm will set the price that will maximize PROFITS

10. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Imperfect Competition: What Stays the Same?? The graph for IMPERFECT COMPETITION looks a bit different than Perfect Competition - but many of the rules are still true. These rules still apply for all market structures: Profit-Maximization still occurs at MR=MC All of our Cost Curves still look & function the same (MC, ATC, AVC, …) D=AR=P (but no more MR. DARP :(

11. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination MR < D=AR=P… but why?

12. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Why does the D=AR=P curve slope downward? The Firm IS the Market The market demand curve IS the firm’s demand curve There are no alternatives to a pure monopoly. If the monopolist raises the price, quantity sold declines (at market & firm [same]) The Monopolist can set the price OR the output, but not both. The Consumers will respond to whatever the Monopolist sets.

13. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Why is MR below D=AR=P?? Copy this table, graph the demand curve, then figure TR and MR. QP 014 112 210 38 46 54 TR 0 12 20 24 20 MR -- 12 8 4 0 -4

14. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Why is MR below D=AR=P??

15. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Monopolist operates in the ELASTIC part of the curve An advanced concept: –When MR=0, TR is maximized. –This is the point where Demand is UNIT ELASTIC. –Monopolists will always produce less than this (in elastic part of the curve)

16. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Monopolist operates in the ELASTIC part of the curve

17. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: SR PROFIT-MAXIMIZATION The monopolist expands production until MR=MC At this output level, the demand curve determines the price that must be charged for consumers to purchase that quantity.

18. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: SR PROFIT-MAXIMIZATION RULES FOR BREAKEVEN & SHUTDOWN –It’s easy - they stay the same… If P > ATC == + Ec. Profits If ATC > P >AVC == Neg. Ec. Profits If AVC > P == Firm will shut down production Breakeven point: P=ATC Shutdown point: P=AVC

19. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: in the Long Run In the short-run, a monopoly can make profits or losses. In the long-run, the monopolist can still earn positive economic profits… and typically will. But the Monopoly WILL go out of business if it cannot earn a normal profit in the long-run.

20. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Comparing Monopoly to Perfect Competition Compared to a firm in Perfect Competition… A monopolist produces a smaller quantity, charges a higher price, and can earn a positive economic profit (in Short-Run and Long-Run)

21. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: Steps to creating the graph 1.Draw axes, label P & Q 2.Draw D=AR=P, then MR [MR bisects] 3.Draw MC (nike) 4.Draw ATC & AVC (location will depend on info. Given whether making profit/loss/norm. profit) 5.Draw vertical dotted line through MR=MC (profit-max) 6.Label: Q m == Q where MR=MC P m == D=AR=P at Quantity Q m ATC == ATC at Quantity Q m PROFIT or LOSS box (clearly)

22. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: Create your Own Graph 1.Keeping these steps in mind, draw your own MONOPOLY graph in your notebook. 2.When done, determine if this monopoly is earning: Positive economic profit Normal profit Negative economic profit (loss) Shutting down

23. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: Working with the Graph

24. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination Pure Monopoly: Working with the Graph Identify: (a) Profit, (b) C.S., (c) DWL

25. Characteristics of a Monopoly D=AR=P > MR Monopoly Profit Maximization Comparing Monopoly to Perfect Competition Monopoly: Inefficient?? Price Discrimination