Monopoly versus Perfect Competition

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Presentation transcript:

Monopoly versus Perfect Competition No Monopolies! Monopoly versus Perfect Competition

Demand Curves Competitive vs. Monopoly (b) Monopolist’s Demand Curve ’ (a) Competitive Firm’s Demand Curve Price Price MC MC D = MR $15 D ≠ MR Quantity of Output Quantity of Output A Monopoly is the sole producer => therefore it faces the entire market demand curve

Marginal Revenue Handout

Demand & Marginal-Revenue Price If a monopoly wants to sell more, it must lower price. $11 10 Price falls for ALL units sold. 9 8 7 This is why MR is < P. 6 5 4 Price = AR 3 Demand (average revenue) 2 Marginal revenue 1 –1 1 2 3 4 5 6 7 8 Quantity of Water –2 –3 –4

Profit Maximization All profit-maximizing firms set: MR =MC Competitive firms: P = MR = MC Monopoly firm = P > MR = MC

Monopoly vs. Perfect Competition Monopolies charge a higher price & provide lower Qty Monopoly charges a Price > MC Competitive firms: Price = MC Monopolies create deadweight loss to society Competitive firms: no deadweight loss

Monopolist Equilibrium Costs and Revenue MR D Profit = (P – ATC) * Qty ($20 - $10) * 100 = $1,000 profit MC $20 E1 P1 Q1 Monopoly Profit ATC Set MR = MC $10 ATC Quantity 100

Sample Monopoly Equilibrium Costs and Revenue Maximize Profit set MR = MC Profit = (P – ATC) * Qty MR D MC ATC P1 Q1 E1 Monopoly profit Maximize Total Revenue: Set MR = 0 ATC Quantity

Pure Monopoly Worksheet

Pure Monopoly Problem #1 Costs and Revenue Profit = $150 per unit (P – ATC) * Qty ($750 - $600) * 4 = $600 profit D MR MC ATC $600 $750 P1 Q1 E1 Monopoly profit Produce 4 Units MC = MR @ $300 ATC Quantity 4

Worksheet Problem #2 MC ATC D MR Profit = (P – ATC) * Qty Costs and Revenue Profit = (P – ATC) * Qty ($15 - $8) * 100 = $700 profit MR D MC $15 P1 Q1 E1 Monopoly profit ATC $8 ATC Quantity 100

Quick Review: PC vs. Monopoly

Collusion & Cartels Collusion Cartel An agreement among firms about Qty to produce or price to charge Antitrust laws prohibit this behavior in USA Cartel A group of firms acting in unison Example: OPEC OPEC Meeting

How to become a price setter

DeBeers Video

Graphing Supply & Demand ------------------ E2 -------------------- Q2 S1 S1 D1 D1 P1 --------------- -------- Q1 P1 --------------- E1 E1 ---------- Q1 Demand is kept artificially high & inelastic through advertising Supply is kept artificially low by DeBeers End Result: Higher prices paid & larger quantity sold