Presentation on theme: "Costs and Profit Maximization Under Competition"— Presentation transcript:
1 Costs and Profit Maximization Under Competition Chapter 11Costs and Profit Maximization UnderCompetition
2 Chapter Outline What price to set? What quantity to produce? Profits and the average cost curveEntry, exit, and shutdown decisionsEntry, exit, and industry supply curves
3 IntroductionImagine that you are the owner of a stripper oil well. You must answer three questions:What price to set?What quantity to produce?When to enter and exit the industry?In this chapter will answer these questions for a competitive industry
4 What Price to Set? In a competitive market you are a “price-taker” As an oil producer your price is the world price.If you set the price higher, no one will buy your oil.Why would you set the price lower?Elasticity of demand for your oil is perfectly elasticLet’s see what this means.
5 What Price to Set? World Market for Oil Demand for Your Oil P ($/barrel)P ($/barrel)MarketsupplyDemandfor youroil$50Demanddemand82QuantityQuantity(millions of barrels)(barrels)
6 The Perfectly Elastic Demand Curve A perfectly elastic demand curve is a reasonable assumption under the following conditions:Product being sold is similar across sellers.There are many buyers and sellers, each small relative to the total market.There are many potential sellers.
7 The Perfectly Elastic Demand Curve Demand curves are most elastic in the long runLong run – the time after all exit or entry has occurred.Short run – the time period before exit or entry can occur
8 What kind of demand elasticity does the competitive firm face? In a competitive market, what happens when a firm prices its product above the market price? Below the market price?What kind of demand elasticity does the competitive firm face?How can a firm that produces oil face a very elastic demand curve when the demand for oil is inelastic?To nextTry it!
9 What Quantity to Produce? We assume the objective is to maximize profit.Total revenue is price x quantity = P x QTotal cost is the cost of producing a given quantity of outputProfit = p = Total Revenue – Total Cost
10 Don’t Forget: Opportunity Cost! Total cost = Explicit cost + Implicit costExplicit cost is cost that requires a money outlayImplicit cost is an opportunity cost that does not require an outlay of moneyEconomic profit includes implicit costsAccounting profit = Total revenue – explicit costsOutput decisions should be based on economic profit
11 Maximizing ProfitFrom now on our measure of total costs includes implicit costs.Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC)Fixed Costs are costs that do not vary with output (Q)Variable Costs are costs that do vary with output (Q)
12 Maximizing ProfitMarginal revenue (MR) = Change in TR from selling one more unit.Marginal cost (MC) = Change in TC from producing one more unit.Profits are maximized at the level of output where MR = MCIf MR > MC → ↑profits from ↑QIf MR < MC → ↓profits from ↑QLet’s look at some hypothetical data
13 Profit MaximizationLet’s show this with our model.
14 Maximizing Profit P ($/barrel) Note: In a competitive market, price does not vary with the firm’s output. This implies:$150Marginalcost100At Q = 8: P = MR = MCProfits are maximizedWorldMarketprice→50MR = PQuantity(barrels)12345678910
15 Maximizing Profit: Effect of an Increase in the Market Price ($/barrel)$150Marginalcost100MR = PAs P↑, the firm expands production along its MC curveWorldMarketprice→50MR = PQuantity(barrels)12345678910
16 Profits and the Average Cost Curve Average cost is the cost per unit of output, i.e. the total cost divided by QWe can now add a column to our table showing AC at each level of output.At the profit maximizing quantity, is AC at its lowest value?
17 Profits and the Average Cost Curve Let’s see how profits are measured in our model.
18 Maximizing Profit P ($/barrel) P = AR = $50 Profits are maximized at Q = 8At Q = 8, AC = $25.75Profit = (P – AC) x Q or,Profit = ($50 - $25.75) x 8 = $194Maximizing profits ≠ minimum AC$150Marginalcost100AverageCost (AC)WorldMarketprice→50MR = P25.7517Quantity(barrels)12345678910
19 Maximizing Profit P ($/barrel) MR = MC doesn’t necessarily mean the firm makes a profitP = $17 is the minimum price the firm will acceptP > $17 → P > AC → ProfitsP < $17 → P < AC → Losses$150Marginalcost100AverageCost (AC)5017Quantity(barrels)12345678910Let’s look at this a little closer.
20 Maximizing Profit P ($/barrel) Marginal cost Loss Average Cost (AC) 25 50LossAverageCost (AC)P < ACis a lossP < ACis a profit2517P = MRQuantity(barrels)12345678910
21 price is less than average cost. price is equal to average cost. If a firm is earning positive economic profit, it must be the case thatprice is less than average cost.price is equal to average cost.price is equal to total cost.price is greater than average cost.To nextTry it!
22 Marginal and Average Cost Curve The MC curve intersects the AC curve at its minimum point.When marginal cost is just below average cost, the AC curve is falling.When marginal cost is just above average cost, the AC curve is rising.So, AC and MC curves must meet at the minimum of the AC curve.
23 Entry, Exit, and Shutdown Decisions When should a firm enter or exit an industry?Long runFirms will enter the industry when P > ACFirms will exit the industry when P < ACWhen P = ACProfits are zeroNo incentive to either leave or enter the industry
24 Entry, Exit, and Shutdown Decisions Why would firms remain in an industry if profits are zero?Zero profits – means at the market price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity cost.When economists say zero profits, they mean what people mean by normal profits.
25 The Short-Run Shutdown Decision Sometimes it makes sense to continue running a business even if P < AC.A ski resort is an exampleIf it shuts down during the summer…Revenue = 0, but…They still have fixed costs to coverInsurance, security, payments to the bank…If it stays openRevenue is positiveSki lift for hikers and bikersRestaurants and hotelIf TR > VC they are better off staying openThe following table provides some numbers to help us.
26 The Short-Run Shutdown Decision A Firm Should Stay Open in the Short Run if it Can Cover its Variable CostsDecisionFixed CostsVariable CostsSummer RevenuesProfitsShut Down100-100Stay Open5075-75Note: By staying open, the firm still loses money, but it loses less than if it shuts down for the summer
27 Entry and Exit with Uncertainty and Sunk Costs In the real world firms must modify the entry and exit rules.P > AC → Firm should enter only if the price is expected to be above AC for a long time.P < AC → Firm should exit only if the price is expected to below AC for a long time.Let’s return to our oil firm as an example.
28 Entry and Exit with Uncertainty and Sunk Costs Entry means drilling an oil well.Costs of drilling an oil well are sunk costs.Sunk costs – A cost that once incurred can never be recovered.Unlesslong enough to cover sunk costs, the well won’t be drilled.
29 Entry and Exit with Uncertainty and Sunk Costs It doesn’t always make sense to exit an industry immediately when P < ACHigh entry and exit costsLong-term it may be best to “weather the storm”Only ifFor an extended period of time will the firm exit
30 Entry and Exit with Uncertainty and Sunk Costs Firms must base their exit or entry decisions on lifetime expected profit when…It is costly to enter or exitThere is uncertainty about future pricesUncertainty about the national economy can cause many firms to reduce investment simultaneously.
31 Entry, Exit, and Industry Supply Curves Industry supply curve depends on how costs change as industry output ↑ or ↓Constant cost industry – Industry costs do not change with greater outputIncreasing cost industry - Industry costs ↑ with greater outputDecreasing cost industry – Industry cost ↓ with greater outputWe discuss each of these in turn.
32 Constant Cost Industries Domain name registration industry has two characteristics:Satisfies all the conditions for a competitive industryMajor input , bank of computers, is small compared to the world supply of computers.ImplicationsPrice is quickly driven down to AC ($6.99).Price doesn’t change much.Let’s see how this works.
33 Constant Cost Industry PPMarketFirmSSAMCBSSBB$7.99ACCLRSC$6.99AADBDAqQQAQBQCqAqB↑ Market demand → ↑ market price → ↑ profits↑ profits → Existing firms ↑ q → ↑ Q↑ profits → Firms enter → Short-run supply shifts right → ↓ P, ↑QProfits return to normal
34 Increasing Cost Industries Industry costs rise as industry output increases.The oil industry is an increasing cost industryGreater quantities of oil can only be obtained by using more expensive methodsDrilling deeperDrilling in more inhospitable spotsExtracting oil from tar sandsWe can use the following example to illustrate.
36 Increasing Cost Industries Any industry that buys a large fraction of the output of and increasing cost industry will also be an increasing cost industry.Three examples:Gasoline industry - ↑demand for gas → ↑ price of oil → ↑ price of gasElectricity - ↑ demand → ↑ demand for coalCoal – for the same reasons as oil
37 Decreasing Cost Industry: A Special Case Industry clusters can create decreasing cost industriesAs one industry grows, suppliers of inputs move to be close → ↓ costsExamples:Dalton Georgia – “Carpet Capital of the World”Silicon Valley – Computer technologyHollywood – MoviesAalsmeer, Holland – Flower distributionCost reductions are temporary
38 Is the automobile manufacturing industry a constant cost, increasing cost, or decreasing cost industry? Why?Where are most U.S. films made? Why do you think the film industry is concentrated in such a small town?At the end of every year, Alex pockets $5,000 ($15,000 in revenue minus$10,000 in interest cost), while Tyler pockets $15,000. It’s tempting to concludethat Tyler’s well is more profitable, but that would be a mistake. Tyler could haveleft his $200,000 in the bank, and at a 5% rate of interest, he would have earned$10,000 a year in income. Tyler’s opportunity cost is the $10,000 in income hegave up when he invested his money in drilling the oil well. Thus, once we takeinto account all costs, including opportunity costs, Alex and Tyler’s wells areequally profitableTo nextTry it!
39 Industry Supply: Summary Constant cost industryIndustry is small relative to its input markets…It can expand without ↑ costs → flat supply curve. (Constant cost industry)Increasing cost industryExpansion → ↑ costs → supply curve slopes upwardDecreasing cost industryExpansion → ↓ costs → supply curve slopes downwardRare and temporary
40 Takeaway We answered the following 3 questions What price to set?: P = market priceWhat quantity to produce?: P = MCWhen to enter and exit an industry?In the long-runEnter if P > ACExit if P < ACIncreasing cost industry: LRS slopes upConstant cost industry: LRS flatDecreasing cost industry: LRS slopes down
42 Competition and The Invisible Hand Chapter 12Competition and The InvisibleHand
43 Introduction In this chapter we return to the “invisible hand” With the right institutions, individuals acting in their self-interest can generate outcomes that…are neither part of their intention nor design.have desirable properties.
44 Chapter OutlineInvisible Hand Property 1:The minimization of total industry costs of productionInvisible Hand Property 2: The balance of industriesCreative destructionThe invisible hand works with competitive markets
45 Introduction We will show that: Competitive markets balance production across firms in a given industry so that…total industry costs are minimized.Entry (P > AC) and exit (P < AC) result in balanced production across different industries so that…Total value of production is maximized.
46 In a competitive market with N firms… Invisible Hand Property 1: The Minimization of Total Industry Costs of ProductionIn a competitive market with N firms…All firms face the same market priceTo maximize profits each firm adjusts its output until P = MCTherefore, the following will be true:This results in minimizing total costs for the industryTo see how, lets use an example
47 Invisible Hand Property 1: The Minimization of Total Industry Costs of Production Assume:You own two farms.Each has a different MC curve.You wish to produce a total of 200 bushels of wheat.You should produce all 200 bushels on the farm with the lowest MC. Right?Not necessarily.To see why, lets use a diagram.
48 Invisible Hand Property 1: The Minimization of Total Industry Costs of Production Farm 1Farm 2$$Total cost of producing 200bushels on farm 1Total cost of producing 200bushels on farm 2MC1MC2200Bushelsof corn200Bushelsof cornIt costs less to produce all 200 bushels on farm 2.
49 Invisible Hand Property 1: The Minimization of Total Industry Costs of Production What if we produce a little less on farm 2 and a little more on farm 1?$$↓ Cost due to producingless on farm 2Net result: ↓total costof producing 200bushelsMC1MC2↑ Cost due to producingMore on farm 1Bushelsof corn200Bushelsof corn
50 Invisible Hand Property 1: The Minimization of Total Industry Costs of Production Only when MC1 = MC2 is it not possible to reallocate production and reduce costs.$$MC1MC2MCLessMore75Bushelsof corn125200Bushelsof corn
51 Invisible Hand Property 1: The Minimization of Total Industry Costs of Production Summary:If MC1 > MC2 → ↓Q1, ↑Q2 → ↓ Total CostsCosts saved by ↓Q1 > costs increased by ↑Q2If MC1 < MC2 → ↑Q1, ↓Q2 → ↓Total CostsCosts increased by ↑Q1 < costs saved by ↓Q2If MC1 = MC2 → Total costs are minimized.Costs increased by ↑Q1 = Costs decreased by ↓Q2Costs increased by ↓Q1 = Costs decreased by ↑Q2
52 The “really important part”: Invisible Hand Property 1: The Minimization of Total Industry Costs of ProductionThe “really important part”:As owner of the farms you can allocate your production across farms so that MC1 = MC2.What if the farms are owned by different people in different states?Each farmer faces the same market price.Each maximizes profits by producing where: P = MCTherefore, P = MC1 = MC2
53 Invisible Hand Property 2: The Balance of Industries Entry or exit work to ensure that…Labor and capital move across industriesProduction is optimally balancedGreatest use is made of our limited resources.It is possible to minimize the cost of producing any given level of output but…To minimize cost across industries:Each industry should produce the “right” quantity.Invisible Hand Property 2 makes this happen.Let’s see how markets do this.
54 Invisible Hand Property 2: The Balance of Industries Profit is the signal that allocates capital and labor among industries.They need to flow from low-profit industries to high industries.If P > AC, profits are above normal.Capital and labor enter the industry.If P < AC, profits are below normal.Capital and labor exit the industry.Profit rate in all competitive industries tends toward the same level.
55 Creative DestructionElimination Principle – above-normal profits are eliminated by entry, and below-normal profits are eliminated by exit.Resources move toward an increase in the value of production.Entrepreneurs move resources from unprofitable industries to profitable industries.Implication of this principle:Above normal profits are temporary.To earn above-normal profits, entrepreneurs must innovate.
56 Creative Destruction Joseph Shumpeter (1883-1950) “This process of creative destruction is the essential fact about capitalism”The kind of competition that counts: “…the new commodity,the new technology, the new source of supply, the new type of organization…which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives”
57 The Invisible Hand Works with Competitive Markets The invisible hand will not work if…Prices do not accurately signal costs and benefits.Result: no optimal balance between industriesMarkets are not competitive.Result:Monopolists and oligopolists produce less than the ideal amountFirms make above normal profits, and entry is limited.Commodities are public goods.Result: Self interest does not align with social interest
58 Takeaway Invisible Hand Property 1 Invisible Hand Property 2 P = MC results in minimization of total industry cost.Invisible Hand Property 2Entry and exit result in the best use of limited resources.Elimination principleAbove normal profits are temporary.To earn above normal profits, a firm must innovate
61 Chapter Outline Market Power How a Firm Uses Market Power to Maximize ProfitThe Costs of Monopoly: Deadweight LossThe Costs of Monopoly: Corruption and InefficiencyThe Benefits of Monopoly: Incentives for Research and DevelopmentEconomies of Scale and the Regulation of MonopolyOther Sources of Market Power
62 Introduction AIDS has killed more than 28 million people. In the U.S, deaths from AIDS dropped by 50% due to drugs like Combivir.Price of one pill is about 25 times higher than cost. Why?Market powerThe “you can’t take it with you” effectThe “other people’s money” effect
63 Market PowerMarket Power – the power to raise price above marginal cost without fear that other firms will enter the market.GlaxoSmithKline owns the patent on Combivir.Monopoly – a firm with market power.A simple test:India does not recognize the patentPrice of the drug in India = $0.50 per pill = MC.
64 Market Power Sources of market power: We look at these later Patents Government regulations other than patentsEconomies of scaleExclusive access to an important inputTechnological innovationWe look at these later
65 How a Firm Uses Market Power to Maximize Profit Marginal revenue (MR) – the change in total revenue from selling an additional unit of output.Marginal cost (MC) – the change in total cost from producing an additional unit.To maximize profit, firms produce at the level of output where:
66 How a Firm Uses Market Power to Maximize Profit Firm with market power:Faces a downward sloping demand curve.If it sells an additional unit…It had to lower the price.Additional revenue per unit < current price.In other words:Let’s show this.
67 MR < P Price MR = $10 Quantity At P = 16: TR = $16 x 2 = $32 Marginal Revenue equals:Revenue loss = - $4 +Revenue gain = $14 x 1 = $14MR = $14 -$4 = $10Revenue loss= $2 x 2 = $4$201816141210MR =$10Revenuegain8Demand642Quantity1234567MR
68 Short-Cut for Finding MR MR begins at same point on the vertical axis.MR has twice the slopePriceaP = a – bQMR = a – 2bQLet’s lookat someexamples.MRDemandQuantitya/2ba/b
69 Short-Cut for Finding MR PricePriceaaThe value of Q where MR= 0 is one half of that whereP = 0.DemandDemandMRMRQ250500125250Quantity
70 How a Firm Uses Market Power to Maximize Profit Price($/pill)Profit maximizing output = 80Profit maximizing price = $12.50Profit per pill = $10.00Total profit = $10 x 80 = $800 mDemand$12.50Profit2.50AC//0.50MCQuantity(millions of pills)80MR
71 The Elasticity of Demand and the Monopoly Markup The two effects can make the elasticity of demand for pharmaceuticals more inelastic:The “you can’t take it with you” effectPeople with serious illnesses are relatively insensitive to the price of life saving medicine.The “other people’s money” effectIf third parties are paying for the medicine, people are less sensitive to price.Let’s see how this effects the monopoly markup.
72 The Elasticity of Demand and the Monopoly Markup PricePriceRelatively elastic demandsmall markupRelatively inelastic demandbig markupPILargemarkupPEDemandMCMCDemandQEQuantityQIQuantitySmallmarkupMRMR
73 As a firm with market power moves down the demand curve to sell more units, what happens to the price it can charge on all units?What type of demand curve does a firm with market power prefer to face for its products: elastic or inelastic? Why?At the end of every year, Alex pockets $5,000 ($15,000 in revenue minus$10,000 in interest cost), while Tyler pockets $15,000. It’s tempting to concludethat Tyler’s well is more profitable, but that would be a mistake. Tyler could haveleft his $200,000 in the bank, and at a 5% rate of interest, he would have earned$10,000 a year in income. Tyler’s opportunity cost is the $10,000 in income hegave up when he invested his money in drilling the oil well. Thus, once we takeinto account all costs, including opportunity costs, Alex and Tyler’s wells areequally profitableTo nextTry it!
74 The Cost of Monopoly: Deadweight Loss Compared to competition monopolies reduce total surplus (CS+ PS)This implies a deadweight loss.Let’s use a model of a constant cost industry to show this.
75 How a Firm Uses Market Power to Maximize Profit Because the profit maximizing monopolist will produce where:And because P > MR:Result: deadweight loss (inefficiency)To show this we will use the monopoly model.
76 The Cost of Monopoly: Deadweight Loss CompetitionPMonopolyConsumers getthisConsumers getthisMonopolist gets thisPMNo one gets this(deadweight loss)CSProfitDWLPCSupplyMC = ACDemandDemandQQQC = OptimalquantityQMQCMRP = MCP > MC
77 The Cost of Monopoly: Deadweight Loss Deadweight loss in practiceGlaxoSmithKline prices Combivir at $12.50 a pillMC = $0.50Deadweight loss = value of the sales that do not occur because P > MC.
78 The Costs of Monopoly: Corruption and Inefficiency Many monopolies are born of government corruptionIn Indonesia Tommy Suharto, the presidents son, was given the clove monopoly.He bought the entireLamborghini company with his monopoly profits.
79 The Costs of Monopoly: Corruption and Inefficiency Monopolies are especially harmful if they control a good that is used to produce other goods.In Algeria a dozen or so army generals each control a key goodPeople refer to these men as General wheat, General tire….Each general tries to get a larger share of the economic pie.Result: greater DWL and the “pie” shrinks
80 The Benefits of Monopoly: Incentives for Research and Development Drug prices are lower in India and CanadaIndia does not offer strong patent protection.Canada’s government controls drug prices.Should the U.S. government limit patents?It costs $1billion to develop a new drug.Patents are one way of rewarding R&D.Without patents why would firms spend on R&D?Result: Fewer new drugs will be developed.
81 The Benefits of Monopoly: Incentives for Research and Development What the U.S. government opened up the pharmaceutical industry to competition?Competition will drive price down to MC.R&D costs are not included in MCFirms can not cover their R&D costs.Result: Fewer drugs will be created.
82 The Benefits of Monopoly: Incentives for Research and Development Other goods have high development costs.Information goods – goods that are valuable for their content.Examples: Music, movies, computer files, books.Typically MC is very low.High development costs and low MC of production → Need for patent or copyright protection.Policy trade-off:Lower prices todayFewer new ideas in the future
83 The Benefits of Monopoly: Incentives for Research and Development Nobel Prize winner Douglas North, economic historian:“The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.”
84 Patent Buyouts: A Potential Solution The government could buy the patent for a little more than monopoly profits … then rip it up.Competitors would enter and drive the price of the drug to its MC.What’s the downside?Higher taxes – they also create DWLDifficulty in determining the right pricePossible corruption
85 Economies of Scale and the Regulation of Monopoly Economies of scale – the advantages of large-scale production that reduce AC as quantity increases.Natural monopoly – is said to exist when a single firm can supply the entire market at a lower cost than two or more firms.Let’s use a model to learn the economics of natural monopoly.
86 Natural Monopoly P Average costs for small firms It is possible for PM < PCIf economies of scale are large enoughCompetitivepricePCMonopolypricePMACMCDemandQuantityQCQMOptimalquantityCompetitivequantityMonopolyquantityMR
87 Natural Monopoly A price control can increase output. What price should the government choose?P = MC → Optimal level of outputAt P = MC, P < AC due to economies of scaleThe firm’s profit is less than the normal level.P = AC, is a compromiseProfits are normalThere is a deadweight loss.Let’s go to our model to take a closer look.
88 Price Control and Natural Monopoly Averagecosts forsmall firmsIf the government sets:P = MCFirm loses moneyCompetitivepricePCMonopolypricePMACLoss if P = MCMCDemandQuantityQCQMOptimalquantityCompetitivequantityMonopolyquantityMR
89 Price Control and Natural Monopoly Averagecosts forsmall firmsIf the government sets:P = ACProfit = normalResults in DWLCompetitivepricePCMonopolypricePMP = ACACMCDemandQuantityQCQMOptimalquantityCompetitivequantityMonopolyquantityMR
90 Electric ShockGovernment ownership is another solution to natural monopoly.Worked well until 1970s when new technologies reduced average costs at small scales.Result: Electric generationwas no longer a natural monopoly.
91 California’s Perfect Storm California deregulated wholesale electricity prices in 1998.Problems:Transmission and distribution remained natural monopolies.Electricity is difficult to store.Booming economy required importing electricity from other states.Inelastic demand curvesSummer-winter 2008Several factors quadrupled wholesale pricesGenerators of electricity could exploit market power.
92 Other Sources of Monopoly Power Barriers to entry – factors that increase the cost to new firms of entering an industry.Some Sources of Monopoly Power (Barriers to Entry)Sources of Market PowerExamplePatentsGSK’s patent on CombivirLaws preventing entryIndonesian clove monopoly, Algerian wheat monopoly, U.S. Postal serviceEconomies of scaleSubways, cable TV, Electricity transmission, major highwaysHard to duplicate inputsOil, diamonds, Brands and trademarks: Rolex watchesInnovationApple’s iPod, Wolfram’s Mathematica software, eBay
93 Consider ticket prices at major league baseball and professional football parks. How does the term “barrier to entry” help explain their pricing?How permanent are barriers to entry in the following cases: NBA basketball franchises, U.S. Postal Service delivery of first class mail, U.S. Postal Service delivery of parcels?At the end of every year, Alex pockets $5,000 ($15,000 in revenue minus$10,000 in interest cost), while Tyler pockets $15,000. It’s tempting to concludethat Tyler’s well is more profitable, but that would be a mistake. Tyler could haveleft his $200,000 in the bank, and at a 5% rate of interest, he would have earned$10,000 a year in income. Tyler’s opportunity cost is the $10,000 in income hegave up when he invested his money in drilling the oil well. Thus, once we takeinto account all costs, including opportunity costs, Alex and Tyler’s wells areequally profitableTo nextTry it!
94 Takeaway You should be able to: Find MR given either a demand curve or a table of prices and quantities.Given demand and MC curves, find and label monopoly price and quantity, and DWL.With the addition of the AC curveFind and label monopoly profitDemonstrate that the markup of price over MC is larger the more inelastic the demand.
95 Takeaway Monopolies involve trade-offs between DWL and innovation. Natural monopolies involve trade-offs between DWL and economies of scale.Regulation of monopolies is a challengeRegulation of Cable TV kept prices low but also qualityDeregulation of electricity in California left them at the mercy of firms with market power.Many monopolies are created to transfer wealth to politically powerful elites.