Unit 4: Imperfect Competition

Review Partner up. Have 1 partner draw a monopoly graph. Have the other partner explain the graph, and make any necessary changes.

How much is the TR, TC and Profit or Loss? Conclusion: A monopoly produces where MR=MC, but charges the price set by the demand curve. How much is the TR, TC and Profit or Loss? P $10 9 8 7 6 5 MC ATC Profit =$20 D TC =$180 TR =$200 MR Q 16 17 18 19 20 3

Elastic and Inelastic Range P Elastic Inelastic $15 10 5 Total Revenue Test If price falls and TR increases then demand is elastic. D Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TR A monopoly will only produce in the elastic range MR $64 40 20 Total Revenue Test If price falls and TR falls then demand is inelastic. TR Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 4

Are Monopolies Efficient? 5

What do you remember about? What are different ways to measure efficiency? What is deadweight loss? How does deadweight loss affect efficiency? In perfect competition, what was productive efficiency?

Monopolies vs. Perfect Competition S = MC P CS In perfect competition, CS and PS are maximized. Ppc PS D Q Qpc 7

Monopolies vs. Perfect Competition S = MC P At MR=MC, A monopolist will produce less and charge a higher price Pm Ppc D MR Q Qm Qpc 8

Monopolies vs. Perfect Competition Where is CS and PS for a monopoly? S = MC P CS Total surplus falls. Now there is DEADWEIGHT LOSS Pm PS Monopolies underproduce and over charge, decreasing CS and increasing PS. D MR Q Qm 9

Are Monopolies Productively Efficient? No. They are not producing at the lowest cost (min ATC) Does Price = Min ATC? $9 8 7 6 5 4 3 2 P MC ATC D MR Q 1 2 3 4 5 6 7 8 9 10 10

Monopolies are NOT efficient! Are Monopolies Allocatively Efficiency? No. Price is greater. The monopoly is under producing. Does Price = MC? $9 8 7 6 5 4 3 2 P MC ATC Monopolies are NOT efficient! D MR Q 1 2 3 4 5 6 7 8 9 10 11

Because there is little external pressure to be efficient Monopolies are inefficient because they… Charge a higher price Don’t produce enough Not allocatively efficiency Produce at higher costs Not productively efficiency Have little incentive to innovate Why? Because there is little external pressure to be efficient 12

Because there is little external pressure to be efficient Monopolies are inefficient because they… Charge a higher price Don’t produce enough Not allocatively efficiency Produce at higher costs Not productively efficiency Have little incentive to innovate Why? Because there is little external pressure to be efficient 16

Regulating Monopolies

Why Regulate? How do they regulate? Why would the government regulate a monopoly? To keep prices low To make monopolies efficient How do they regulate? Use Price controls: Price Ceilings Why don’t taxes work? Taxes limit supply and that’s the problem

Where should the government place the price ceiling? 1.Socially Optimal Price P = MC (Allocative Efficiency) OR 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit)

Regulating Monopolies Where does the firm produce if it is unregulated? P MC Pm ATC D MR Q Qm 20

Regulating Monopolies Price Ceiling at Socially Optimal Socially Optimal = Allocative Efficiency P MC Pm ATC Pso D MR Q Qm Qso 21

Regulating Monopolies Price Ceiling at Fair Return Fair Return means no economic profit P MC Pm ATC Pso Pfr D MR Q Qm Qso Qfr 22

Regulating Monopolies Unregulated Socially Optimal P MC Fair Return Pm ATC Pso Pfr D MR Q Qm Qso Qfr 23

Regulating a Natural Monopoly What happens if the government sets a price ceiling to get the socially optimal quantity? P The firm would make a loss and would require a subsidy MC ATC Pso MR D Q Qsocially optimal 24

Price Discrimination

Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Examples: Airline Tickets (vacation vs. business) Movie Theaters (child vs. adult) All Coupons (spenders vs. savers) SHS football games (students vs. parents)

PRICE DISCRIMINATION Requires the following conditions: Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. Those with inelastic demand are charged more than those with elastic Requires the following conditions: Must have monopoly power Must be able to segregate the market Consumers must NOT be able to resell product

P Qd TR MR $11 -

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $10

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $10 $10 $9

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $10 $10 $9 $10 $9 $8

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $7 4 34 7 $10 $10 $9 $10 $9 $8 $10 $9 $8 $7

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49 $10 $10 $9 $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4

WHEN PRICE DISCIMINATING Qd TR MR $11 - $10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49 $10 $10 $9 WHEN PRICE DISCIMINATING MR = D $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4

Price Discriminating Monopoly Regular Monopoly vs. Price Discriminating Monopoly P MC Pm ATC D MR Q Qm

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand MC ATC D MR Q 36

Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Q Qnm 37

Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC Many prices More profit D =MR Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Q Qnm 38

Can You Do The Following? 1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit