23MeierPP10_18e - Chapter 10 Chapter Monopoly Four Market...

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Unformatted text preview: Chapter 10 Chapter Monopoly Four Market Models Pure Monopoly Pure Pure Competition Market Structure Continuum Characteristics of Monopoly Characteristics • One seller One • No close substitutes No • Considerable power - price maker Considerable • Entry is blocked Entry • Some advertising Some Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Monopoly Activity Monopoly Monopolies are relatively small in Monopolies number – 5% of economic activity. 5% Economies of scale may make Economies monopoly desirable in these cases. monopoly Economies of Scale: Economies The Natural Monopoly Case The Average Average Total Cost $20 15 10 ATC If ATC declines over extended output, ATC least-cost production is realized only if there is one producer - a natural monopoly natural 0 50 100 200 Quantity Two Monopoly Models Two Unregulated Regulated 200 175 150 125 100 75 50 25 P MONOPOLY Price Maker Role P > MR D = P = AR MR 0 1 2 3 4 5 6 7 8 9 10 Q PURE COMPETITION Perfectly Elastic Demand Perfectly P Price Taker Role Demand = AR = P = MR Quantity Demanded (sold) COMPARISONS Perfect Competition • Price taker Price • Demand is perfectly elastic Demand • Demand curve is horizontal Demand • P (Demand, AR) =MR (Demand, • No power No • Insignificant part of market Insignificant COMPARISONS Monopoly • Price maker Price • Demand is likely inelastic Demand • Demand slopes downward Demand • P (Demand, AR) >MR (Demand, • Considerable power Considerable • Monopoly is the market Monopoly Monopoly Monopoly Most Profitable Output Two Methods Total Revenue – Total Cost Marginal Revenue – Marginal Cost TOTAL REVENUE TOTAL TOTAL COST TR = P x Q TR TC = TFC + TVC EP = TR - TC TOTAL REVENUE TOTAL COST Produce when: Produce TR > TVC Losses < TFC TOTAL REVENUE TOTAL TOTAL COST Shut down when: Shut TR < TVC Losses > TFC MARGINAL REVENUE MARGINAL MARGINAL COST • P > AVC: produce AVC: MR = MC MR EP = (P-ATC) x Q EP • P < AVC: shut down AVC: Monopoly Revenue and Cost Quantity Price of (Average Total Marginal Marginal Output Revenue) Revenue Revenue Average Total Cost Total Cost Marginal Cost Profit + or loss - 0 1 2 3 4 5 6 7 8 9 10 $172 $172 162 162 152 152 142 132 122 112 102 92 82 72 $0 ] 162 ] 304 ] 426 ] 528 ] 610 ] 672 ] 714 ] 736 ] 738 ] 720 $162 $190.00 142 135.00 122 113.33 102 100.00 82 94.00 62 91.67 42 91.43 22 93.73 2 97.78 - 18 103.00 $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] 90 80 70 60 70 80 90 110 130 150 - $100 $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Demand, Marginal Revenue, Total Revenue Demand, Monopoly Monopoly 200 Dollars 150 200 50 MR D = P = AR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 Dollars 500 250 TR 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Demand, Marginal Revenue, Total Revenue Demand, Any Imperfectly Competitive Firm Any 200 Dollars 150 200 50 MR D = P = AR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 Dollars 500 250 TR 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Total revenue and total costs (dollars) Total-Revenue-Total Cost Approach TC $ Economic Profit TR 0 1 2 3 4 5 6 7 8 9 10 Q Total-Revenue-Total Cost Approach Total-Revenue-Total Total revenue and total costs (dollars) $ TC Economic Loss 0 1 2 3 4 5 6 7 8 9 10 TR Q Profit Maximization Under Monopoly Profit 200 175 150 125 100 75 50 25 $ MR=MC MC $122 ATC D MR 0 1 2 3 4 5 6 7 8 9 10 Q Profit Maximization Under Monopoly Profit 200 175 150 125 100 75 50 25 $ MC $122 $94 Profit ATC D MR 0 1 2 3 4 5 6 7 8 9 10 Q Profit Maximization Under Monopoly Profit 200 175 150 125 100 75 50 25 $ Profit Per Unit MC $122 $94 Profit ATC D MR = MC 0 1 2 3 4 5 6 7 8 MR 9 10 Q $ Profit Per Unit MC M N Profit P T ATC D MR = MC O X MR Q Loss Minimization Under Monopoly Loss 200 175 150 125 100 75 50 25 $ Loss Per Unit MC ATC Loss AVC D MR = MC 0 1 2 3 4 5 6 7 8 MR 9 10 Q Price Discrimination Conditions... Conditions... 1 - Monopoly Power 2 – Multiple Elasticities 3 - No Resale Price Discrimination Results... Results... 1 - More Profits 2 - More Production Perfect Competition $ Lowest ATC – lowest price P = MC – most output Best allocation MC LRAC D=AR=P=MR Output Profit Maximization Under Monopoly Profit 200 175 150 125 100 75 50 25 $ MC $122 $94 Profit ATC D MR 0 1 2 3 4 5 6 7 8 9 10 Q Economic Effects of Monopoly Economic $ P>MC underallocation MC Pm Pc Monopolist will sell less units at a higher price than in competition D MR Qm Qc Q $ Price and Costs Monopoly Price MR = MC ATC MC D MR Q Regulated Monopoly Regulated $ Price and Costs Socially Optimum Price Price = MC ATC MC D MR Q Regulated Monopoly Regulated $ Price and Costs Fair Return Price Price = ATC ATC MC D MR Q ...
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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