Perfect competition perfect perfect competition

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Unformatted text preview: tly elastic firm demand curve • produces output for which MR = MC • p = MR = MC • monopoly influences its price: marginal revenue curve decreasing • produces output for which MR = MC • p > MC; p > MR A single-price monopoly restricts output and charges single-price a higher price than at the competitive equilibrium. higher Price Monopoly vs. Monopoly Perfect Competition Perfect Single-price monopoly: Higher price and smaller output PM S = MC MC Perfect Perfect competition competition PC D MR QM QC Quantity Quantity Price Monopoly vs. Perfect Competition Perfect PM PC Consumer surplus S = MC MC Deadweight loss Monopoly’s ’s gain gain D = MB MB Producer surplus MR 0 QM Efficient quantity QC Quantity Rent Seeking Rent • the attempt to capture a consumer surplus, a producer surplus, or an economic profit. • occurs when a monopolist attempts to capture some of the consumer surplus for itself. – Buy a monopoly – Create a monopoly Price Rent Seeking Rent ATC Consumer surplus S = MC MC PM D Lost Profit MR 0 QM QC Quantity ATC Rent-seeking Rent-seeking costs are fixed fixed costs and costs shift shift up the ATC up ATC curve until firm breaks even at profitmaximizing price price Price Discrimination Price • Selling a good or service at a number of different prices • Most prices discriminators are not monopolists. Price Discrimination Price To be able to price discriminate, a monopoly must: 1. Identify and separate different buyer types 2. Sell a product that cannot be resold The key idea behind price discrimination is to convert consumer surplus into economic profit for the monopoly. Price (dollars per trip) A Single Price of Air Travel Single 2100 Consumer surplus 1800 MC Economic profit ATC 1500 1200 900 $48 million 600 300 0 MR 5 8 D 10 15 20 Passengers (thousands per year) Price (dollars per trip) Price Discrimination – Air Travel Price 2100 Increased economic profit from price discrimination MC 1800 1600 ATC 1400 1200 900 600 300 0 MR 2 4 6 8 D 10 15 20 Passengers (thousands per year) Price (dollars per trip) Perfect Price Discrimination Discrimination Increase in economic 2100 1800 profit from perfect price discrimination MC ATC 1600 1400 1200 900 600 Increase in output 300 0 2 4 6 D 8 11 15 20 Passengers (thousands per year) Monopolies are Criticized for: Monopolies • Being able to make economic profits indefinitely • Being both productively and allocatively inefficient • Producing less and charging more • Creating an unequal distribution of income and wealth Monopoly Benefits Monopoly • Economies of scale – Increase in output brings a decrease in average cost • Economies of scope – increase in the range of goods produced decreases average total cost. • Incentives to innovation Regulating a Natural Monopoly Monopoly • • • • Tax Marginal cost pricing Average cost pricing Regulation Price and cost (dollars per hour) Taxing a Monoploy MC 20 ATCtax 14 10 ATC Economic Economic Tax Revenue profit $12 D MR 0 1 2 3 4 5 Quantity (haircuts per hour) Price and cost (cents per cubic metre) Regulating a Natural Monopoly Monopoly 100 Profit maximizing 80 Average cost pricing 60 ATC MR 10 0 1 2 Marginal cost pricing MC 3 4 Quantity (millions of cubic metres per day) (millions Regulating a Monopoly Regulating • Agency • Public ownership • Laws to restrict monopolistic behavior...
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This note was uploaded on 11/14/2013 for the course ECONOMICS 1021 taught by Professor Parkin during the Fall '10 term at UWO.

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