Micro Class Notes Ch15 Monopoly

Monopoly Markets (ch 15)

Recall the characteristics of a monopoly monopo ly market: one firm unique product

complete barriers to entry

Monopolies exist because of barriers to entry. - control the resource - government license

- natural monopoly

A monopoly is a ³price ³price setter´. That is, the firm firm can determine what price to charge. - charge according to demand I. The Firm¶s Marginal Revenue and Demand TR = P x Q AR = P MR = change in TR  change in Q MR P

The demand curve for a monopoly firm is ____________________________________ because it is the market demand curve. - the monopoly is the only o nly firm« therefore the market demand is the same as t he firm demand The ______________________________ curve is also downward sloping. - for linear demand, marginal revenue is twice as steep Ex:

demand: marginal revenue: demand: marginal revenue:

P = 100 ± 1/3Q MR = P = 50 ± Q MR =

II. The Firm¶s Firm¶s Output and Price We learned previously that the firm will produce the level of __________________ where marginal revenue is equal to marginal cost. Graphically:

Since a monopolist is a price setter, it can charge a  price as high as ________________ will allow.

 Notice that for a monopolist, monopo list, at Q*, the price is higher than marginal cost and marginal revenue. - monopolist is not allocatively allocatively efficient e fficient

Algebraically: The Whatsa Widget Widget Company has a monopoly monopoly in the sale sale of widgets. Here is the firm¶s demand and total cost: Quantity Price TR TC MR MC profit 0 15 8 1 14 11 2 13 16 3 12 26 4 11 39 5 10 57

III. The Firm¶s Profits Graphically Because a monopoly IS the entire market, we rarely need to worry about the ___________________   point.

We will instead focus on the ATC and a nd profits. if P > ATC, then profits if P = ATC, then break even if P < ATC, then loss A monopoly firm will compare P to ATC at the profit maximizing level of output to determine its  profits. - at the quantity where MR = MC, compare the price pr ice to the ATC

A. At Q*, P > ATC

B. At Q*, P = ATC.

C. At Q*, P < ATC

Recap: 1) Produce the level of out put where MR = MC. 2) Charge the price according to the demand curve at Q*. 3) Compare the price to the t he ATC at Q* to determine profits or losses. IV. Efficiency A monopoly firm ___________________________________________ productively efficient. (producing at minimum of ATC)

A monopoly firm is __________________ allocatively efficient P > MC always Monopoly Market vs Competitive Market Monopoly markets result in some ________________________________. The demand curve represents the value that buyers place on each additional unit of a good or  service. The marginal cost curve represents the additional cost of producing each unit of a good or  service. The ____________________________ quantity of output is found where the demand curve and the marginal cost curve intersect. This is where total surplus is maximized.

A monopoly market results in a lower quantity and higher price than a co mpetitive market would have. Because the quantity quant ity is lower lower and the t he price is higher, there is deadweight loss. Total surplus is not at its maximum.

Remember, there are some benefits to monopolies: - although patents create monopolies, monopo lies, the patent system encourages innovation - the costs of production may make a single producer more efficient due to economies of scale

V. Price Discrimination We know that people have ________________________ price elasticities of demand.

We also know that a firm¶s revenues depend on __________________________ of demand. - a firm can charge a higher price to someone with an inelastic demand - to get someone with elastic demand to purchase the item, a firm firm would wou ld charge a lower price  ____________________________________: the business practice of selling the same good at different  prices to different customers - based on their the ir price elasticity elasticity of demand de mand Examples: Movie tickets: matinees and evening shows are different different prices Student /Senior /Senior Citizen discounts: discounts: show your your ID and get a discount discount Coupons: if you have a coupon, the item item is cheaper  Business travel vs vs leisure travel: travel: travel from a Tuesday to Thursday is is more expensive than from a Friday to Sunday Quantity discount: buy more and and get a price price break  In order to be able ab le to price discriminate, a firm must: 1) have the ability to set its price 2) be able to group consumers by their willingness to pay 3) be able to keep the ³markets´ separate (prevent arbitrage) Price discrimination results in ________________________ for the firm because more output is sold and consumer surplus is reduced. - lower the price in the elastic e lastic market « gain sales - raise the price in the inelastic market« lose few sales Some consumers are also better off. o ff.