1. Unit 4: Imperfect Competition

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

3. 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 3

4. Elastic and Inelastic RangeP
Elastic
Inelastic
$15 10 5
Total Revenue Test
If price falls and TR increases then demand is elastic. D Q 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 4

5. Are Monopolies Efficient?5

6. 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?

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

8. 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

9. 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

10. 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 10

11. 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 11

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 12

13. 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

14. Regulating Monopolies

15. 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

16. 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)

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

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

19. 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

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

21. 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

22. Price Discrimination

23. 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)

24. 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

25. P Qd TR MR
$11 -

26. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10
$10

27. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9
$10
$10 $9

28. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8
$10
$10 $9
$10 $9 $8

29. Results of Price DiscriminationQd 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

30. Results of Price DiscriminationQd 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

31. WHEN PRICE DISCIMINATINGQd 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

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

33. A perfectly discriminating can charge each person differently so the Marginal Revenue = DemandMC
ATC D MR Q 36

34. 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

35. 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

36. 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