Download Micro Chapter 22 Presentation 2

Monopoly Demand Curve
The industry and the firm are the same
 The demand curve is downsloping

Supply Curve
There is no supply curve for a pure
monopoly
 It is possible for different demand
conditions to bring about different prices
for the same output

Marginal Revenue
MR is less than P for a monopoly except
for the 1st unit
 They can increase sales only by
charging a lower price

Price and Marginal Revenue
Marginal Revenue is Less Than Price
• A Monopolist is
Selling 3 Units at
$142
• To Sell More (4),
Price Must Be
Lowered to $132
• All Customers
Must Pay the Same
Price
• TR Increases $132
Minus $30 (3x$10)
$142
132
122
112
Loss = $30
D
102
Gain = $132
92
82
0
1
2
3
4
5
6
Price Maker
The monopolist sets the price of its
product by controlling the supply
 They will set prices in the elastic range
of demand (TR test---as price declines,
TR increases)

Profit Maximization
MR = MC rule still applies
 Draw a vertical line up from where MR =
MC to the D curve to find P

Profit Maximization
Price, Costs, and Revenue
$200
175
MC
150
Pm=$122
125
100
75
Economic
Profit
ATC
A=$94
D
MR=MC
50
25
0
MR
1
2
3
4
5
6
Quantity
7
8
9
10
Price, Costs, and Revenue
Loss Minimization By A Pure Monopolist
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
Qm
Quantity
Economic Effects of
Monopoly
Price, Output, and Efficiency
Pure
Monopoly
Purely
Competitive
Market
S=MC
MC
Pm
P=MC=
Minimum
ATC
Pc
b
c
Pc
a
D
D
MR
Qc
Qm
Qc
Pure Competition is Efficient
Monopoly P is >MC
And Is Inefficient- make too little at too high a cost
Misconceptions About
Monopolies
1. Not highest price- seek maximum
profit, not price. Some high prices
would reduce sales and total revenue
 2. Seek maximum total profit not unit
profit
 3. Possibility of loss- monopolies are not
immune to escalating resource costs or
changing tastes

X inefficiency
When a firm produces output at a level
higher than the lowest possible cost of
producing
 Reasons:
 1. Poorly motivated workers
 Bad management- looking to expand
their power, nepotism etc
***competitive firms avoid x inefficiency
because of competition

Rent-Seeking Behavior

Any activity designed to transfer income
or wealth to a particular firm or resource
supplier at someone else’s or even
society’s expense- increases costs
without making a better product
Problems with Monopolies
1. Charge higher than competitive prices
 2. Stifle innovation
 3. Engage in rent-seeking behavior
 4. X inefficiency

Government Actions
1. if the monopoly is obtained through
anti-competitive means, the government
can apply anti-trust laws
 2. Regulate prices
 3. Can ignore it if the monopoly appears
short-lived

Price Discrimination

The practice of selling a specific product
at more than one price when the price
differences are not justified by cost
differences
3 Types of Price Discrimination
1. Charging each customer in a single
market the maximum price he is willing
to pay
 2. Charging each customer one price for
the first set of units purchased and a
lower price for the subsequent units
purchased
 3. Charging some customers one price
and other customers another price

Conditions for Price
Discrimination
1. Monopoly Power
 2. Market segregation- separate buyers
into different classes
 3. No resale

Examples of Price Discrimination
1. Golf and movie theatres- different age
and time costs (seniors, weekend)more expensive on the weekend
 2. Airlines charge higher rates on big
business travel days

Figure 8a: Price
Discrimination
(a)
Dollars per
Ticket
MC
$120
E
ATC
80
MR
30
D
Number of Round-trip Tickets
Figure 8b: Price
Discrimination
(b)
Dollars per
Ticket
Additional profit from
price discrimination
MC
$160
120
MR
10
30
D
Number of Round-trip Tickets
Figure 8c: Price
Discrimination
(c)
Dollars per
Ticket
MC
$120
100
G
Additional profit from
price discrimination
F
H
MR
30
40
D
Number of Round-trip Tickets
Using the Theory: Price
Discrimination at Colleges and
Universities


Most colleges and universities give some kind of
financial aid to a large proportion of their students
Financial aid has been used as an effective
method of price discrimination
 Designed to increase revenue of the college

Colleges have long been in an especially good
position to benefit from price discrimination,
because they satisfy all three requirements
 Face downward-sloping demand curves
 Able to identify consumers willing to pay more
 Able to prevent low-price customers from reselling to high-
price customers
Socially Optimal Price
P = MC
 Regulated price set as a price ceiling
(maximum cost)

Fair Return Cost
P = ATC
 At times the socially acceptable cost
causes the firm to “lose”
 Governments can subsidize the
difference or allow the firm to charge
enough to have “fair returns”

Regulated Monopoly
Perfectly Discriminating
Monopoly

Unregulated
Perfectly Discriminating