unit 4: imperfect competition 1. memorizing vs. learning 12-35711131-71923 try memorizing the above...
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4 Market Structures 3TRANSCRIPT
Unit 4: Imperfect
Competition
1
Memorizing vs. LearningMemorizing vs. Learning12-35711131-71923
Try memorizing the above numberHow effective is memorizing it?
The point: If you try to MEMORIZE all the graphs of economics you will
forget them. You must LEARN them!
4 Market Structures
3
PerfectCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET STRUCTURES
Every product is sold in a market that can be considered one of the above market structures.
For example:•Fast Food Market•The Market for Cars•Market for Operating Systems (Microsoft)•Strawberry Market•Cereal Market
PureMonopoly
MonopolisticCompetition Oligopoly
Imperfect Competition
4
Monopoly
5
Characteristics of Monopolies
6
5 Characteristics of a Monopoly1. Single Seller• One Firm controls the vast majority of a
market• The Firm IS the Industry 2. Unique good with no close substitutes3. “Price Maker”The firm can manipulate the price by changing
the quantity it produces (ie. shifting the supply curve to the left).
Ex: California electric companies7
5. Some “Nonprice” Competition
4. High Barriers to Entry
• No immediate competitors
• Despite having no close competitors, monopolies still advertise their products in an effort to increase demand.
5 Characteristics of a Monopoly
• New firms CANNOT enter market
• Firm can make profit in the long-run
8
Examples of Examples of MonopoliesMonopolies
9
What do you already know about monopolies?
True or False?1. All monopolies make a profit.2. Monopolies are usually efficient.3. All monopolies are bad for the economy.4. All monopolies are illegal.5. Monopolies charge the highest price
possible6. The government never prevents
monopolies from forming.10
11
Four Origins of MonopoliesFour Origins of Monopolies1. Geography is the Barrier to EntryEx: Nowhere gas stations, De Beers Diamonds, San Diego
Chargers, Cable TV, Qualcomm Hot Dogs…-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to EntryEx: Water Company, Firefighters, The Army,
Pharmaceutical drugs, rubix cubes… -Government allows monopoly for public benefits or
to stimulate innovation. -The government issues patents to protect inventors
and forbids others from using their invention. (They last 20 years)
12
Four Origins of MonopoliesFour Origins of Monopolies3. Technology or Common Use is the Barrier to EntryEx: Microsoft, Intel, Frisbee, Band-Aide…-Patents and widespread availability of certain products
lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to EntryEx: Electric Companies (SDGE)• If there were three competing electric companies
they would have higher costs.• Having only one electric company keeps prices low-Economies of scale make it impractical to have
smaller firms. Natural Monopoly- It is NATURAL for only one firm to
produce because they can produce at the lowest cost.13
Drawing Drawing MonopoliesMonopolies
14
Good news…1.Only one graph because the
firm IS the industry.2.The cost curves are the same3.The MR= MC rule still applies4.Shut down rule still applies
15
The Main Difference• Monopolies (and all Imperfectly
competitive firms) have downward sloping demand curve.
• Which means, to sell more a firm must lower its price.
• This changes MR…
THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE!
16
D
Combine the Demand of an industry with the costs of a firm.
Quantity
ATC
MC
What about MR?
17
Price
D
Combine the Demand of an industry with the costs of a firm.
Quantity
ATC
MC
MR18
Price
P Qd TR MR$11 0 0 -
Why is MR less than Demand?
19
$10
P Qd TR MR$11 0 0 -$10 1 10 10
Why is MR less than Demand?
20
$10
P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8
Why is MR less than Demand?
$9 $9
21
$10
P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6
Why is MR less than Demand?
$9 $9
$8 $8 $8
22
$10
P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7 $7
23
$10
P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
24
$10
P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
25
$10
P Qd TR MR$11 0 0 -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0$4 7 28 -2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $426
$10
P Qd TR MR$11 0 - -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0$4 7 28 -2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $427
$10
P Qd TR MR$11 0 - -$10 1 10 10$9 2 18 8$8 3 24 6$7 4 28 4$6 5 30 2$5 6 30 0$4 7 28 -2
Why is MR less than Demand?
$9 $9
$8 $8 $8
$7 $7 $7
$6 $6 $6 $6
$7
$6
$5$5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
MR IS LESS THAN PRICE
28
1 2 3 4 5 6 7
P
Q
D
MR
Why is MR below Demand?
29
$109876543
21
1 2 3 4 5 6 7
P
Q
D
MR
Why is MR below Demand?
30
$109876543
21
At price $10, TR = $10
When price falls to $9, MR =$8
What happens to MR when price falls to $8?
1 2 3 4 5 6 7
P
Q
D
MR
Why is MR below Demand?
31
$109876543
21
At price $10, TR = $10
When price falls to $9, MR =$8
What happens to MR when price falls to $8?
MR CURVE IS LESS THAN
DEMAND CURVE!!!
Calculating Marginal Revenue
32
Calculate TR and Marginal RevenueQuantity Price TR MR
0 $161 152 143 134 125 116 107 98 89 7
10 6 33
Quantity Price TR MR0 $16 01 15 152 14 283 13 394 12 485 11 556 10 607 9 638 8 649 7 63
10 6 60
Calculate TR and Marginal Revenue
34
Quantity Price TR MR0 $16 0 -1 15 15 152 14 28 133 13 39 114 12 48 95 11 55 76 10 60 57 9 63 38 8 64 19 7 63 -1
10 6 60 -3
Calculate TR and Marginal Revenue
35
Quantity Price TR MR0 $16 0 -1 15 15 152 14 28 133 13 39 114 12 48 95 11 55 76 10 60 57 9 63 38 8 64 19 7 63 -1
10 6 60 -3
Calculate TR and Marginal Revenue
36
Plot the Demand, Marginal Revenue, and Total Revenue Curves
37Q
$15
10
5
$64
40
20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
P
Q
$15
10
5
$64
40
20
TR
D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MR
Demand and Marginal Revenue CurvesWhat happens to TR when MR hits zero?
Total Revenue is at it’s peak when
MR hits zero
38
P
TR
Elastic vs. Inelastic Range of Demand Curve
39
Elastic and Inelastic Range
40Q
$15
10
5
$64
40
20
TR
D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MR
P
TR
Total Revenue TestIf price falls and TR
increases then demand is elastic.
Elastic
Total Revenue TestIf price falls and
TR falls then demand is inelastic.
A monopoly will only
produce in the elastic
range
Inelastic
Maximizing Profit
41
D
MR
$9876543
2
MC ATC
42 1 2 3 4 5 6 7 8 9 10 Q
P
What output should this monopoly produce?MR = MC
How much is the TR, TC and Profit or Loss?
Profit =$6
D
$9876543
2
Conclusion: A monopolists produces where MR=MC, buts charges the price consumer are willing to pay identified by the demand curve.
MC ATC
43 1 2 3 4 5 6 7 8 9 10 Q
P
MR
D
MR
$10987654
3
MCATC
446 7 8 9 10 Q
P
TR= $90TC= $100Loss=$10
AVC
What if cost are higher? How much is the TR, TC, and Profit or Loss?
D
MC
MR
TR=TC=
Profit/Loss=Profit/Loss per Unit=
Identify and Calculate: $70
$14$56
ATC
$2
45
$1098765
4 1 2 3 4 5 6 7 8 9 10 Q
P
Are Monopolies Efficient?
46
Q
P
D
S = MC
Ppc
Qpc
CS
PS
47
In perfect competition, CS and PS are
maximized.
Monopolies vs. Perfect Competition
At MR=MC,A monopolist willproduce less and
charge a higher price
48
Monopolies vs. Perfect Competition
Q
P
D
S = MC
Ppc
Qpc
MR
Pm
Qm
Where is CS and PS for a monopoly?
49
Monopolies vs. Perfect Competition
Q
P
D
S = MC
MR
Pm
Qm
CS
PS
Total surplus falls. Now there is
DEADWEIGHT LOSS
Monopolies underproduce and over charge, decreasing CS and increasing PS.
Are Monopolies Productively Efficient?
Does Price = Min ATC? No. They are not producing at the lowest
cost (min ATC)
50
D
$9876543
2
MC ATC
1 2 3 4 5 6 7 8 9 10 Q
P
MR
Are Monopolies Allocatively Efficiency?
Does Price = MC? No. Price is greater. The monopoly is under
producing.
51
D
$9876543
2
MC ATC
1 2 3 4 5 6 7 8 9 10 Q
P
MR
Monopolies are NOT efficient!
Monopolies are inefficient because they…1. Charge a higher price2. Don’t produce enough• Not allocatively efficiency
3. Produce at higher costs • Not productively efficiency
4. Have little incentive to innovateWhy?
Because there is little external pressure to be efficient
52
QDMR
MCATC
P
Natural Monopoly
53Qsocially optimal
One firm can produce the socially optimal quantity at the lowest cost due to economies scale.
It is better to have only one firm because ATC
is falling at socially optimal quantity
Lump Sum vs. Per Unit
Taxes and Subsidies
54
ACDC Econ Video
2007 FRQ #1